Do financial analysts care about ESG?
Published in Finance Research Letters 63 [CNRS cat. 3/ABS 2].

This article studies whether financial analysts value Environmental, Social and Governance (ESG) criteria when issuing target prices. Raw results show that analysts issue lower target prices to firms with high ESG scores. We show that this relationship is, in fact, driven both by the existing size bias in ESG data and by the industry-level structure of ESG scores. When controlling for these elements, we actually find that financial analysts are more optimistic about firms that have high E, S, and G scores. Notably, the effect is more pronounced for the environmental (E) score, with a one standard deviation change associated with a 2.09 percentage point increase in the analysts’ target prices implied returns.

Finance and intelligence: An overview of the literature
with Nicolas Eber (Sciences Po and EM Strasbourg, University of Strasbourg) and Patrick Roger (University of New-Caledonia)
Published in Journal of Economic Surveys 38 [CNRS cat. 2/ABS 2].

Do more intelligent investors take better economic decisions than less intelligent ones? Is risk attitude, in particular risk/loss aversion, linked to cognitive ability? Does an investor’s cognitive ability impact his/her patience? Is financial performance positively linked to investor’s intelligence? These research questions have become highly relevant with the development of behavioral economics and behavioral finance, following the recognition that humans are not homo economicus. This paper reviews the several strands of literature devoted to answering the above questions. We first discuss the barely debated definitions and measures of intelligence/cognitive ability used in psychology, economics,
and finance. We then review the results related to the (controversial) link between risk aversion and cognitive ability. We observe that the literature provides clear results for patience; individuals with a higher level of cognitive ability being more patient on average. Finally, we review the contributions linking (successfully or not) portfolio choice and financial performance to cognitive ability.

Number sense, trading decisions and mispricing: An experiment
with Patrick Roger (EM Strasbourg, University of Strasbourg) and Marc Willinger (University of Montpellier)
Published in Journal of Economic Dynamics and Control 135 [CNRS cat. 1].

We show that the acuity of the Approximate Number System (ANS), a cognitive system that allows humans and many animal species to evaluate quantities without using exact calculations, is a strong predictor of subjects’ earnings in experimental markets. We measure ANS acuity with a bounded number line estimation (NLE) task and find that subjects who perform better on the NLE task, obtain higher earnings in a continuous double auction experimental market. We underline two channels through which high ANS acuity subjects achieve better performance: they are rewarded for offering liquidity and are faster at exploiting trading opportunities. We also show that, in a given market, the distribution of NLE scores influences mispricing. Our results are unchanged when we control for differences in trading intensity, risk aversion, background education or demographic characteristics.

Are investors less aggressive on small price stocks?
with Carole Métais (University of Strasbourg)
Published in Journal of Financial Markets 59 [CNRS cat. 2].

Award for the Best Article published in 2021 using EUROFIDAI BEDOFIH High frequency data

In this paper, we investigate whether number processing impacts the limit orders of retail investors. Building on existing literature in neuropsychology that shows that individuals do not process small numbers and large numbers in the same way, we study the influence of nominal stock price level on order aggressiveness. Using a unique database that allows us to identify order and trade records issued by retail investors on Euronext Paris, we show that retail investors, when posting non-marketable orders, are less aggressive on small price stocks than on large price stocks. This difference in order aggressiveness is not explained by differences in liquidity and other usual drivers of order aggressiveness. We provide additional evidence by showing that no such difference exists for limit orders of high frequency traders (HFTs) over the same period and the same sample of stocks. This finding confirms that our results are driven by a behavioral bias and not by differential market dynamics between small price stocks and large price stocks.

What drives retail portfolio exposure to ESG factors?
with Catherine D’Hondt (UCLouvain) and Maxime Merli (EM Strasbourg, University of Strasbourg)
Published in Finance Research Letters 46 [CNRS cat. 3].

Using both survey and trading data from 9,286 retail investors for the 2005–2011 period, we highlight the impact of financial literacy and risk tolerance on retail stock portfolio exposure to environmental, social and corporate governance (ESG) factors. Our results also reveal that the three ESG factors are not homogeneous and should be considered separately. Lower exposure to ESG factors during the crisis period suggests that ESG investing is a luxury good for most investors.

The effect of price magnitude on analysts’ forecasts: evidence from the lab (french version)
with Wael Bousselmi (CREST, ENSAE, École polytechnique), Patrick Roger (EM Strasbourg, University of Strasbourg) and Marc Willinger (University of Montpellier)
Published in Revue Economique 72 [CNRS cat. 2], September 2021.

Recent empirical research in accounting and finance shows that the magnitude of stock prices influences analysts’ price forecasts (Roger et al., 2018). In this paper, we report the
results of a novel experiment where some subjects are asked to forecast future prices in a continuous double auction market. In this experiment, two successive markets take place: one where the fundamental value is a small price and one where the fundamental value is a large price. Although market prices are higher (compared to fundamental value) in small price markets than in large price markets, our results indicate that analyst subjects’ forecasts are more optimistic in small price markets compared to large price markets. Analyst subjects strongly anchor on past price trends when building their price forecasts and do not mitigate subject traders’ bias. Overall, our experimental findings support the existence of a small price bias deeply rooted in the human brain.

A re-examination of analysts’ differential target price forecasting ability
with Patrice Fontaine (CNRS – Eurofidai)
Published in Finance 41 [CNRS cat. 2], March 2020.

Previous studies find persistent differences in target price accuracy and argue that financial analysts possess differential abilities to forecast stock prices. We first show that persistent differences in accuracy across analysts are driven by the characteristics of the firms the analysts follow. Those who cover easier-to-forecast firms appear more accurate.  We then control for firm-characteristics by using alternative measures of target price performance. We introduce a new measure of target price forecast quality and we adapt two relative measures of accuracy from the earnings forecast literature. We then apply five different statistical tests of persistence to each measure of performance. In contrast with the previous literature, we do not find convincing evidence of differential target price forecasting abilities across analysts.

Behavioral bias in number processing: Evidence from analysts’ expectations
with Patrick Roger (EM Strasbourg, University of Strasbourg) and Alain Schatt (HEC Lausanne)
Published in Journal of Economic Behavior & Organization 149 [CNRS cat. 2], May 2018.

2015 Hillcrest Behavioral Finance Award (Finalist)
Strasbourg Place Financière 2016 Best Paper Award

Research in neuropsychology shows that individuals process small and large numbers differently. Small numbers are processed on a linear scale, while large numbers are processed on a logarithmic scale. In this paper, we show that financial analysts process small prices and large prices differently. When they are optimistic (pessimistic), analysts issue more optimistic (pessimistic) target prices for small price stocks than for large price stocks. Our results are robust when controlling for the usual risk factors such as size, book-to-market, momentum, profitability and investments. They are also robust when we control for firm and analyst characteristics, or for other biases such as the 52-week high bias, the preference for lottery-type stocks and positive skewness, and the analyst tendency to round numbers. Finally, we show that analysts become more optimistic after stock splits. Overall, our results suggest that a deeply-rooted behavioral bias in number processing drives analysts’ return expectations.

The coverage assignments of financial analysts
Published in Accounting and Business Research 48 [CNRS cat. 3], January 2018.

Previous studies document that forecast accuracy impacts analyst career outcomes. This paper investigates the influence of forecast accuracy on coverage assignments. I show that brokerage houses reward accurate analysts by assigning them to high-profile firms and penalise analysts exhibiting poor accuracy by assigning them to smaller firms. The coverage of high-profile firms increases the potential for future compensation linked to investment banking and trading commissions. In addition, covering such firms increases analysts’ recognition from buy-side investors, which, in turn, increases the likelihood of obtaining broker votes and votes for the I/I star ranking. Overall, my results indicate that high forecast accuracy leads to increased future compensation.

Idiosyncratic volatility and nominal stock prices: Evidence from approximate factor structures
with Patrick Roger (EM Strasbourg, University of Strasbourg) and Alain Schatt (HEC Lausanne)
Published in Finance Bulletin 1, March 2017.

Approximate factor structures defined by Chamberlain (1983) allow to test whether a given quantitative firm characteristic (the nominal stock price in this paper) is a determinant of the idiosyncratic volatility of stock returns. Our study of 8,000 U.S stocks over the period 1980-2014 shows that small price stocks exhibit a higher idiosyncratic volatility than large price stocks. This relationship is persistent over time and robust to variations in the number of common factors of the approximate factor structure. Moreover, this small price effect does not hide a small-firm effect because it is still valid when we analyze the tercile of large firms. Our result confirms that small price stocks have lottery-type characteristics and, therefore, it is not in line with the efficient market hypothesis.

Reporting errors in the I/B/E/S earnings forecast database: J. Doe vs. J. Doe
Published in Finance Research Letters 20, [CNRS cat. 3], February 2017.

This paper provides evidence of systematic errors in the way I/B/E/S reports analyst earnings forecasts. Analysis of the I/B/E/S earnings forecast database over the 1982-2014 period pinpointed a lack of consistency in the identification of financial analysts, a number of whom are consequently (1) identified by several different codes, and (2) erroneously attributed forecasts that were issued by namesakes. The present empirical investigation reveals that over 10% of the analyst codes in the database are subject to such reporting errors. These reporting errors impact the evaluation of analysts’ characteristics, and may bias empirical studies that rely on tracking analysts.

When behavioral portfolio theory meets Markowitz theory
with Marie Pfiffelmann (EM Strasbourg, University of Strasbourg) and Olga Bourachnikova (EM Strasbourg, University of Strasbourg)
Published in Economic Modelling 53 [CNRS cat. 2], February 2016.

The Behavioral Portfolio Theory (BPT) developed by Shefrin and Statman (2000) is often set against Markowitz’s (1952) Mean Variance Theory (MVT). In this paper, we compare the asset allocations generated by BPT and MVT without restrictions. Using U.S. stock prices from the CRSP database for the 1995–2011 period, this paper is the first study that empirically determines the BPT optimal portfolio. We show that Shefrin and Statman’s (2000) optimal portfolio is Mean Variance (MV) efficient in more than 70% of cases. However, our results also indicate that the BPT portfolio exhibits a high level of risk, high returns and positively skewed returns. We show that the risk aversion coefficient of the BPT portfolio is up to 10 times lower than the risk aversion degree shown by typical MV investors. Even if the asset allocations may coincide, typical MV investors will not usually select the BPT optimal portfolios. These results underline that MVT and BPT cannot be used interchangeably.

What drives the herding behavior of individual investors?
with Maxime Merli (EM Strasbourg, University of Strasbourg)
Published in Finance 34(3) [CNRS cat. 2], December 2013.

Award for the Best Article published in 2013 using EUROFIDAI data
Award for the Best Article published in Finance (the academic journal of the French Finance Association) in 2013

We introduce a new measure of herding that allows for tracking dynamics of individual herding. Using a database of nearly 8 million trades by 87,373 retail investors between 1999 and 2006, we show that individual herding is persistent over time and that past performance and the level of sophistication influence this behavior. We are also able to answer a question that was previously unaddressed in the literature: is herding profitable for investors? Our unique dataset reveals that the investors trading against the crowd tend to exhibit more extreme returns and poorer risk-adjusted performance than the herders.

Working Papers

Green values and transparency of household savings: A survey
with Maxime Merli (EM Strasbourg, University of Strasbourg) and Mariya Pulikova (EM Strasbourg, University of Strasbourg)
R&R, 2nd round, European Journal of Finance [ABS 3]

This paper studies the interest of individuals for transparency regarding how their savings are invested. Using a sample of 1,075 questionnaires from a panel of French individuals who participate in the financial decisions of their households, we investigate whether these individuals care about the sector allocation and the carbon footprint of their savings.
Our results show that green consumption values are the main driver of interest for transparency. Furthermore, by analyzing the willingness of individuals to pay for transparency, we show the reluctance of individuals who exhibit green values to pay for this kind of information. In addition, our results show that individuals with pecuniary motives for sustainable investments also attach great importance to transparency. From a general standpoint, our findings contribute to analyzing the barriers that may hinder the mobilization of household savings for funding the green transition.

Number processing and price dynamics: A market experiment
with Wael Bousselmi (CREST, ENSAE, École polytechnique), Patrick Roger (EM Strasbourg, University of Strasbourg) and Marc Willinger (University of Montpellier)

2017 AFSEE Award (French Experimental Economics Association)

In contrast with financial theory, much empirical evidence shows that stock price magnitude influences portfolio choices or future returns. The usual justifications for such an influence most often refer to stock characteristics (lottery-like features like a high variance and a positive skewness of returns). In this paper, we demonstrate that the stock price level impacts investors behavior not only because it correlates with some stock characteristics but, mainly on its own, as a result of a neuropsychological bias. In the context of experimental markets, we show that subjects process small and large prices differently, even though the probability distribution of returns on the small price asset and the large price asset are identical. Two consecutive treatments are performed, one with a small fundamental value equal to 6 (small price market) and one with a fundamental value equal to 72 (large price market). Small price markets exhibit greater mispricing than large price markets, a result obtained in both between-participants and within-participants analyses. Our findings indicate that price magnitude has a direct impact on how the subjects’ brain perceive the distribution of future returns. Though at odds with standard finance theory, our findings are consistent with: (1) evidence in neuropsychology on the use of different mental scales for small and large numbers, and (2) empirical results in the finance literature.