Behavioral Biases and Market Reaction to Public Information

Abstract

This study examines the impact of behavior biases, public announcements and information asymmetry on the stock market reaction in the context cement sector companies listed on Pakistan Stock Exchange (PSX) during the period of 2018-1023. The dependent variable of the study is cumulative average abnormal return (CAAR). The independent variable of the study are public announcements which is measured through different types of disclosures such as earnings announcements, dividend declarations, mergers, and other corporate disclosures. The other variable is Information asymmetry which is measured using the bid-ask spread and Albert S. Kyle price impact model. Behavioral biases are measured using proxy variables such as herding behavior which is captured through concurrent trading patterns and unusual increases in trading volume around the announcement period. Investor sentiment is analyzed through media tone, analysts’ reports, and overall media coverage. Regression analysis has been used to determine the relationship between information asymmetry, investor behavior and stock price adjustments. The results of the study show that information asymmetry has a positive and statistically significant relationship with the dependent variable, cumulative average abnormal return (CAAR). Similarly, public announcements, behavioral biases and liquidity have been found to have a positive and significant relationship with the dependent variable. However, firm size shows a negative but statistically significant relationship with CAAR, indicating that larger firms experience relatively smaller abnormal returns. The R-square value of the model is 0.47, which indicates that 47% of the variation in the dependent variable (CAAR) is explained by the independent variables included in the study. These findings contribute to the literature by demonstrating that market efficiency is affected not only by public information but also by differences in investor interpretation and cognitive biases. The study underscores the need to consider both informational and behavioral factors when analyzing stock market reactions to public disclosures.

Keywords: CAAR, Public Announcements, Behavioral Biases, Information Asymmetry.