Ad-hoc disclosure - A law and economics approach

c &DVSHU0DWWKLDV³3HUV|QOLFKH$X‰HQKDIWXQJGHU2UJDQHEHLIHKOHUKDIWHU,QIRUPDWion des Kapi- WDOPDUNWV³%.505, 83-90 quoted as Casper, Persönliche Außenhaftung

c DAI - Deutsches AktienInstitut, DAI Factbook, online-version as displayed on www.dai.de/ internet/dai/dai-2-0.nsf/dai_statistiken.htm of in January 2006 quoted as DAI-Factbook

c Daniel, Kent; Hirshleifer, David; Teoh, Siew Hong, ³Investor Psychology in capital markets: HYLGHQFHDQGSROLF\LPSOLFDWLRQV³-RXUQDORI0RQHWDU\(FRQRPLFV- 209 quoted as Daniel, et al., Investor Psychology

c )HOGKDXV +HLQHU ³'LH (LJQXQJ ]XU HUKHEOLFKHQ .XUVEHLQIOXVVXQJ EHL GHU $G-hoc-Publizität, Peter Lang Verlag, Frankfurt, 2003 quoted as Feldhaus, Kursbeeinflussung

c Fleischer, +ROJHU ³'LH SHUV|QOLFKH +DIWXQJ GHU 2UJDQPLWJOLHGHU IU NDSLWDOPDUNWEezogene Falschinformationen - %HVWDQGVDXIQDKPHXQG3HUVSHNWLYHQ³%.5-616 quoted as Fleischer, Persönliche Haftung

c Goshen, Zohar; 3DUFKRPRYVN\*LGHRQ³2QLQVLGHUWUDGLQJ PDUNHWVDQGÄQHJDWLYH³ SURSHUW\

c Gottschalk, (FNDUG³'LHGHOLNWLVFKH+DIWXQJIUIHKOHUKDIWH$G-KRF0LWWHLOXQJHQ³'6W5 1648-1654 quoted as Gottschalk, Deliktische Haftung

c *XW]\ -RFKHQ ³$G-KRF 'LHQVWOHLVWHU LQ 'HXWVFKODQG³ RQOLQH-version as displayed on www.wirtschaftsmedienberatung.de in February 2006, 1-41 quoted as Gutzy, Ad-hoc Dienstleister

c +HPLQJZD\ -RDQ 0DF/HRG ³0DWHULDOLW\ JXLGDQFH LQ WKH FRQWH[W RI insider trading: a call for DFWLRQ³$PHULFDQXQLYHUVLW\ODZUHYLHZ-1206 quoted as Hemingway, Materiality Guidance

c +LUVKOHLIHU'DYLG³,QYHVWRU3V\FKRORJ\DQG$VVHW3ULFLQJ³7KH-RXUQDORI)LQDQFH 1533 ± 1578 quoted as Hirshleifer, Investor Psychology

c Hopt, Klaus J.; Voigt, Hans-Christoph, ³Prospekt- und Kapitalmarktinformationshaftung³, Mohr Siebeck, Tübingen, 2005 quoted as Hopt et al., Prospekt- und Kapitalmarktinformationshaftung

c Krawiec, Kimberly D., ³Fairness, efficiency and insider trading: deconstructing the coin of the

c Möllers, Thomas M.J., ³Insiderinformation und Befreiung von der Ad-Hoc-Publizität nach § 15 Abs. 3 WpHG. Zur Neubeurteilung von mehrstufigen Entscheidungsprozessen durch das $QOHJHUVFKXW]YHUEHVVHUXQJVJHVHW]³:0-1400 quoted as Möllers, Insiderinformation

c Möllers, Thomas M.J., ³The progress of German information disclosure requirements: a com- SDUDWLYH ODZ SHUVSHFWLYH LQ OLJKW RI UHFHQW GHYHORSPHQWV LQ (XURSHDQ &DSLWDO 0DUNHWV ODZ³ North Carolina Journal of international law and commercial regulation #30/2004, 280-334 quoted as Möllers, Progress of German Information Disclosure

c Möllers, Thomas M.J.; /HLVFK )UDQ] &OHPHQV ³'LH +DIWXQJ YRQ 9RUVWlQGHQ DXV † %*% gegenüber Anlegern wegen fehlerhafter Ad-hoc-0HOGXQJHQ³:0-1662, 2001 quoted as Möllers et al., Haftung von Vorständen

c Möllers, Thomas M.J.; Leisch )UDQ] &OHPHQV ³6FKDGHQVHUVDW] ZHJHQ IHKOHUKDIWHU $G-hoc- Mitteilungen ± Anmerkungen zu den Urteilen des LG Augsburg 25.09.2001 und des LG Mün- chen I 28.06.2001³, BKR 2001, 78-83, 2001 quoted as Möllers et al., Schadensersatz

c 0|OOHUV 7KRPDV 0- LQ 0|OOHUV 7KRPDV5RWWHU .ODXV Ä$G-Hoc-3XEOL]LWlW³ 9Hrlag C.H. Beck, München, 2003 quoted as Möllers et al., Ad-Hoc-Publizität

c Rabin, Matthew, ³3V\FKRORJ\DQG(FRQRPLFV³-RXUQDO RI(FRQRPLF/LWHUDWXUH -

46 quoted as Rabin, Psychology and Economics

c Ratner, David L.; Hazen, Thomas Lee, ³Securities regulation in a nutshell³, West Pub. Co., St. Paul, Minn., 2002 quoted as Ratner et al., Securities Regulation

c Schäfer, Carsten, ³Effektivere Vorstandshaftung für Fehlinformation des KapitalPDUNWV"³1=*

c Schäfer, Hans-Bernd, ³The Bundling of Similar Interests in Litigation. The Incentives for Class $FWLRQDQG/HJDO$FWLRQVWDNHQE\$VVRFLDWLRQV´(XURSHDQ-RXUQDORI/DZDQG(FRQRPLFV 2000, 183-213 quoted as Schäfer, Class Action

c Schuster, Thomas, ³Nachrichtenereignisse und Kursbewegungen - Preiseffekte ökonomischer und nicht-|NRQRPLVKFHU9HU|IIHQWOLFKXQJHQLQGHQ1DFKULFKWHQPHGLHQ³(QWZXUIIU9HU|IIHQt- lichung, Mai 2003 as displayed online on www.bwl.tu-

c Shavell, Steven, ³Foundations of economic analysis of law³, Belknap Press of Harvard Univer- sity, Cambridge, Mass., 2004 quoted as Shavell, Foundations of Economic Analysis

c Shefrin, Hersh; Meir, Statman, ³%HKDYLRUDO&DSLWDO$VVHW3ULFLQJ7KHRU\³-RXUQDORI)LQDQFLDO and quantitative analysis, #3, 1994, 323 ± 349 quoted as Shefrin et al., Behavioral CAP Theory

c Solomon, Benjamin Thomas, ³(IILFLHQW0DUNHWVDYDOLG&RQFHUQ³RQOLQHYHUVLRQDV GLVSOD\HG on http://www.quantumrisk.com in February 2006, 1-3 quoted as Solomon, Efficient Markets

c Swan, George Steven, ³The law and economics of insider trading and the talented tenth: Who is GHVSRLOHGE\LQVLGHUWUDGLQJ"³)ORULGDFRDVWDOODZ journal, 2004, 60-83 quoted as Swan, Insider Trading

c Verrecchia, Robert E., ³'LVFORVXUHDQGWKHFRVWRIFDSLWDO$GLVFXVVLRQ³-RXUQDORI$FFRXQWLQJ and Economics #26, 1999, 271-283 quoted as Verrecchia, Disclosure and Cost of Capital

  Outline:  

  A Introduction  10

  a Importance and motivation  10

  b Outline  11

  B Role of information in capital markets and price influence  11

  a Efficient capital market hypothesis  12

  b Behavioral finance  13

  i Information traders and noise traders  13

  ii Publications effects  14

  iii Ease-of-processing effects  14

  iv Bounded willpower and emotional influences  15

  v Halo effect  16

  vi Conformity effect  16

  c Random walk hypothesis and technical analysis  17

  d Empirical pricing process  17

  e Summary  18

  C Necessity of rules for ad-hoc disclosure  19

  a Protection of information as public and collective good  19

  b Motivation of investor participation  20

  c Guarantee of information processing  21

  d Avoidance of future market ignorance  21

  e Protection of informed investor choices  22

  f Prevention of agency conflicts  22

  g Prevention of the destruction of company value  23

  h Rather insufficient results in efficiency measures  23

  i Summary  24

  D Ad-hoc-disclosure  25

  a German law  25

  i Object of legal protection of regulations concerning ad-hoc disclosure  25

1.  Efficiency of capital market and price integrity  25

2.  Investors as a group  26

3.  Individual investor  26

4.  Summary  27

  ii Duty of ad-hoc disclosure  27

  iii Defective ad-hoc disclosure  29

  iv Legal protection in criminal liability  31

  v Legal protection in civil liability  31

1.  Licit plaintiff  32

2.  Defendant  33

  a Issuer  33

  b Board  34

  c Both issuer and board  35

3.  Bases for claims  35

  a Pre-2002 bases  35

  b 37b c German Securities Trading Act (WpHG)  36

  c 826 German Civil Code (BGB)  37

  d Summary  38

4.  Culpability  38

  a 37b c German Securities Trading Act (WpHG)  38

  b 826 German Civil Code (BGB)  39

7

5.  Damage  39

  a 37b 37c German Securities Trading Act (WpHG)  39

  b 826 German Civil Code (BGB)  41

6.  Loss causation and burden of proof  42

  a 37b 37c German Securities Trading Act (WpHG)  42

  b 826 German Civil Code (BGB)  43

  c Facilitation of proof  43

7.  Assertion of rights  45

8.  Statute of limitation and exclusion  45

9.  Summary  46

  b US law  46

  i Duty of ad-hoc disclosure  46

  ii Legal protection in civil liability  47

1.  Licit plaintiff  48

2.  Defendant  49

3.  Basis for claims: Rule 10b-5 Securities Exchange Act  50

4.  Culpability  51

5.  Damage  52

6.  Causation and burden of proof  53

7.  Statute of limitation  54

8.  Assertion of rights  54

  iii Summary  55

  E Mathematical determination of damages awarded  55

  a Rescission  55

  b Out-of-pocket measure  56

  i Damage according to German Law  56

  ii Damage according US Law  56

  iii Flaws of those methods  57

  iv Finance-mathematical models of damage computation  57

1.  Damage as price minus true value  57

  a Fundamental analysis  58

  b Comparable index approach  58

  c Event study approach  58

  d Summary  59

2.  Damage according to the Capital Asset Pricing Model  59

  F Economic analysis of the duty of disclosure  61

  a Issuer as cheapest cost avoider  61

  b VVXHU VVHOI-interest  62

  c 3UHYHQWLRQRIGHWULPHQWDOEHKDYLRULQVLGHWKHLVVXHU VFRPSDQ  62

  d Risk of over-information  63

  e Risk of liability for advice  63

  f Negative 3 rd -party effects such as free-ULGHUV JDLQV  64

  g Summary  64

  Economic analysis of liability of board members  64

  G.  

  a No duty of disclosure  65

  b Infringement on the liability system  65

  c Economic efficiency of enterprise liability  66

  d Risk of misuse  66

  e Deterring effect on business decisions  67

  f Additional cost to the company all shareholders  67

  g Preferential treatment of shareholders  68

8

  h No additional security for plaintiffs  68

  i No additional incentive for correct behavior  69

  j Summary  70

  Economic analysis of damage  71

  H.  

  a No damage at all  71

  b Out-of-pocket expense  72

  c Trivialized damage and shift of the burden of proof  73

  d Out-of-court settlements  74

  e Rescission  75

  i Shift of the risk of investment  76

  ii Bounded rationality and negative externalities  77

  iii Over-compensation and over-deterrence  77

  iv Inequality between shareholders  78

  v Summary  78

  f Duty to mitigate damage  78

  I Economic analysis of the assertion of rights  80

  a US-law: Class action  80

  b German Law: Representative Proceedings  82

  c Summary  83

  J Conclusion  84

9

A. Introduction a. Importance and motivation In the late 1990s, a multitude of people grasped the chance to make a quick fortune in speculating at the stock market: enterprises with a new- technology background, i.e. internet services, information and computing technology, boomed, reached positive corporate figures as well as sharp growth rates and went public. Positive publicity about the companies, the expected profit and the business development led to enormously rising share prices. 7KH LQYHVWRU¶V HDJHUQHVV Wo take part in this rapid wealth accelerated the cycle ± more capital, growth, higher profits, rising stock prices. Nevertheless, the greed cycle came to a quick and devastating end when investors discovered that the figures published did not have suffi- cient or any materialization at all. Share prices collapsed, in some cases to 10% of their original value 1 . Even worse, investors learned that the posi-

tive view on some companies had been provoked by material misstate- ments and/or omissions of and ad-hoc disclosure. EM.TV, Comroad, In- fomatec, Met@box and Biodata were in the news again, but this time it was negative publicity.

Thus, several courts were concerned with claims of deceived investors, and developed rules for the civil liability of both the issuing company and the responsible board members. Furthermore, the legislator enacted in 2002 regulations intended to ameliorate the protection of investors and to ensure the integrity of the capital market by establishing bases for claims for special liability concerning defective or omitted ad-hoc disclosure. As the phenomenon of intentionally defective ad-hoc disclosure or inten- tional admission is well-know in the US since the Wall Street crash of 1929, and the principles of legal protection and sanctions have evolved steadily in the course of several cases, US law often served as an example for the newly enacted German law. In the US, the majority of households possess shares, whereas in Germany, a growing, but still meager 16.7% takes part in the stock market 2 . From this, we must conclude that investor

protection does influence investor behavior. If investors are aware of risks and fairly evaluated expected returns, they will be able to make informed 1 Möllers et al., Haftung von Vorständen, p.1648.

2 DAI-Factbook, chapter 06.3

10

decisions, thus ensuring due functionality of the capital market, whereas the falsification or omission of information leads to loss of confidence, ineffective allocation of capital and finally market failure.

Thus, the legislator must thrive to enforce the flow of correct information by on the one hand prescribing regular disclosure for relevant financial data and entrepreneurial information, and by on the other hand sanction- ing behavior aimed at blurring information, i.e. withholding or intention- ally falsifying it 3 , as only sanctions will provide sufficient incentives to act accordingly. Whereas the principles of regular publicity will not be treated in the following, existing and intended rules and regulation for ad- hoc disclosure will be discussed and analyzed as to whether they provide the intended results.

b. Outline In its beginning, the paper will sum up the role of information in capital markets and its influence on pricing, whereas the most known concepts, VXFK DV )DPD¶V efficient capital market hypothesis and the principles of behavioral finance will be discussed. After detailing the necessity of rules for ad-hoc disclosure, the paper will lay down the rules for legal protec- tion of investors and the sanctions concerning intentionally defective ad- hoc disclosure, be it misstatements or omissions, according to German and US law. This background being clarified, an economic analysis of the distribution of the duty of disclosure, and the liability of board members follows. Furthermore, the damages and their measures will be analyzed in both the finance-mathematical principles of how to compute the actual amount of damage and the economic efficiency of the damage awarded will be determined. The paper will furthermore evaluate the possibilities for the assertion of rights. At last, the economic analysis will provide ar- guments for the conclusive judgment of the current legislation and for further legislative proposals.

B. Role of information in capital markets and price influence Information being the price-governing factor on capital markets, the prin- ciples of its distribution and absorption are the key to its efficient func- tioning. Therefore, any rules and regulations concerned with capital mar- 3 Hopt et al., Prospekt- und Kapitalmarktinformationshaftung, Vorwort p.1.

11

ket efficiency should thrive to incorporate the key concepts of capital markets, as ³WKH ILQGLQJV RIFDSLWDO PDUNHWUHVHDUFKKDYH Vevere implica- tions for a sensible definition of the liability for inIRUPDWLRQ´ 4 . Thus, in the following, the most common scholarly concepts are detailed. a. Efficient capital market hypothesis The efficient capital market hypothesis, developed by E. Fama in the 1970s, claims that share prices at any time reflect available information 5 , whereas three forms exist: According to the strong form, security prices reflect all information, public or not, whereas the semi-strong form would agree only as to already public news 6 . The weak form at last claims that share prices only contain past, but not actual and future information 7 . The information analysis and thus its incorporation in the prices are effec- tuated by professional traders, who constantly gather information and react on it 8 . This advantage in information provides them with above- average gains, and those gains, vice versa, provide an incentive for further gathering of information 9 . Nevertheless, it must be underlined that those above-average gains are not maGH³DWWKHH[SHQVHRIWKHJHQHUDOLQYHVWLQJ public, [but] are incentive and adequate compensation for the effort un- GHUWDNHQ LQ WKH LQWHUHVW RI DOO PDUNHW SDUWLFLSDQWV´ 10 , i.e. correct market prices which reflect the true value of a share with all information incorpo- rated. Due to the work of professional traders, individual investors in small shares can rely on the correctness of prices. They do not need to costly gather information and can be simple ³SULFHWDkHUV´ 11 . Empirical studies have proven both the content of the efficient capital market hypothesis and the enormously short amount of time (only several minutes) after which a piece of information becomes incorporated 12 . Nev- ertheless, the concept has as well been criticized:

At first, we must keep mind the so-called efficient capital market hypo- thesis paradox: if too many investors believe the share price to incorpo- 4 Sauer, Kausalität und Schaden, p.27.

5 Sauer, Kausalität und Schaden, p.26.

6 Swan, Insider Trading, p.74; Escher-Weingart et al., Schadensberechnung, p. 1850. 7 Feldhaus, Kursbeeinflussung, p.107, Perridon et al., p.272.

8 Gutzy, Ad-hoc Dienstleister, p.9.

9 Sauer, Kausalität und Schaden, p.26.

10 Sauer, Kausalität und Schaden, p.26.

11 Sauer, Kausalität und Schaden, p.26.

12 Sauer, Kausalität und Schaden, p.26.

12

rate all information available and rely on it, market prices cease to incor- porate all information as too few investors gather it, and vice versa. If only few investors rely on price integrity, the efficient capital market hy- pothesis works, as investors gather avidly information to reach an insider status which allows them to make gains.

Furthermore, the efficient capital market hypothesis is contested by the fact that insider knowledge actually does exist and can be used by some individual to reap extraordinary benefits, whereas according to the effi- cient capital market hypothesis in its strong version, it must be expected that all information is incorporated in the price. This is even more perti- nent as insiders might play with the market mechanism to enhance gains. Thus, we might negate at least the strong form of the efficient capital market hypothesis.

Thus, related to ad-hoc disclosure, the Efficient capital market hypothesis teaches us that sooner (strong form) or later (semi-strong or weak form) the disclosed piece of information will be contained in the stock prices. b. Behavioral finance Behavioral finance takes on opposite view on capital markets and claims WKDW ³LQGLYLGXDO SV\FKRORJ\ DIIHFWV SULFHV´ 13 , whereas the concept is based on the observation that indiYLGXDOVGR QRW³PD[LPL]HWKHH[SHFWHG YDOXHRIDXWLOLW\IXQFWLRQ´ 14 , but modify such rational considerations with psychological behaviors.

i. Information traders and noise traders According to the behavioral finance models, share traders are two-fold: LQIRUPDWLRQ WUDGHUV ³XVH D >«@ OHDUQLQJ UXOH WR IRUP HVWLPDWHV RI Ue- WXUQV´ 15 , whereas noise traders act without such rules and thus generate errors. Behavioral finance argues that in a market fully composed by in- formation traders, the Efficient capital market hypothesis would be true, while it fails in all other (and thus all real) markets 16 . Whereas the effi- cient market possesses a key single driver who would change prices, i.e. new information, an inefficient market where noise traders participate 13 Hirshleifer, Investor Psychology, p.1533.

14 Rabin, Psychology and Economics, p.11.

15 Shefrin et al., Behavioral CAP Theory, p.323.

16 Shefrin et al., Behavioral CAP Theory, p.323.

13

displays a second driver, i.e. behavior, which drives prices away from efficiency 17 .

7KXV ³QRLVH WUDGHUV GR QRW SURFHVV LQIRUPDWLRQ UDWLRQDOO\´ 18 ± a most valuable conclusion. As we must assume that most individual investors are such noise traders due to their lacking experience and lacking means of efficient information processing, we can expect that they will over- or underestimate information given, or mismap probabilities of its occur- rence 19 GXHWRWKHLU³SDrWLFXODUFRJQLWLYHHUURUV´ 20 . Those are sustained by so-FDOOHG³ERXQGHGUDWLRQDOLW\´LHWKHIDFWWKDWWKHKXPDQEHLQJLVRQO\ able to absorb a certain amount of information 21 . Thus, everyone would, if they were given the same piece of information, derive the conclusion which fits with their general assumptions and beliefs derived by recent history 22 regardless of the content of the information.

ii. Publications effects Experiments suggest that the form in which information is presented in- IOXHQFHV LQYHVWRUV¶ EHKDYLRU DQG WKXV HYHQWXDOO\ VKDUH SULFHV SHUIRr- mDQFHLQIRUPDWLRQ³LVYDOXHGPRUHZKHQLWLVH[SOLcLWO\UHFRJQL]HG>«@ DQGSHUFHSWLRQVDOVRGHSHQGRQKRZLWHPVDUHJURXSHG´ 23 or whether they are included in the disFORVXUH¶VPDLQSDUWRUDVIRRWPDUNVRQO\7KXVZH must conclude that the way ad-hoc disclosure is published influences VWURQJO\ LWV LPSDFW (PSLULFDO HYLGHQFH VXJJHVWV WKDW HYHQ ³LUUHOHYDQW UHGXQGDQW RU ROG QHZV DIIHFW VHFXULW\ SULFHV´ 24 if published in a way ZKLFKSURYRNHVLQYHVWRU¶UHDFWLRQV7KXVLWPXVWEHDFOHDUJRDORIUHJu- lation to define the form in which ad-hoc disclosure must be made in or- der to avoid overreactions by the investing public.

iii. Ease-of-processing effects We must acknowOHGJH WKDW HYHU\ LQGLYLGXDO RQO\ SRVVHVVHV ³OLPLWHG Dt- tenWLRQ PHPRU\DQG SURFHVVLQJFDSDFLWLHV´ 25 for the evaluation of infor- PDWLRQ JLYHQ 7KXV DQ RYHUIORZ RI LQIRUPDWLRQ ZRXOG ³WULJJHU DVVRFLa- 17 Shefrin et al., Behavioral CAP Theory, p.327.

18 Shefrin et al., Behavioral CAP Theory, p.330.

19 Shefrin et al., Behavioral CAP Theory, p.331.

20 Shefrin et al., Behavioral CAP Theory, p.330.

21 Jolls et al., Behavioral approach, p.1477.

22 Shefrin et al., Behavioral CAP Theory, p.337.

23 Daniel, Investor Psychology, p.169; Schuster, Nachrichtenereignisse, p.16. 24 Daniel, Investor Psychology, p.169.

25 Hirshleifer, Investor Psychology, p.1541.

14

WLRQVWKDWLQIOXHQFHMXGJPHQWV´ 26 ± exactly what happened in ad-hoc dis- closure. Several pieces of positive news, be it of the same or related issu- ers, caused investors to judge the market segment or the issuer as a whole (although this was not inferred by the individual ad-hoc disclosures) ± and this judgment was, necessarily, wrong, as it was based on faulty assump- tions. Such a SURFHVV LV KHDYLO\ VXSSRUWHG E\ ³VDOLHQFH DQG DYDLODELOLW\ HIIHFWV´ 27 , i.e. the fact that ad-hoc information differs heavily from for- merly know information and contains events of the normal course of business, which are recalled more easily.

The most severe influence, nevertheless, is the so-FDOOHG ³LOOXVLRQ RI WKH WUXWK´ 28 : people will infer the truth of a statement if it is easy to process. As the ease of processing is a prescription for ad-hoc disclosure 29 , inves- tors will infer truth for each and every disclosure and not spend the neces- sary critical attention to determine whether it indeed is. This is reinforced E\ WKH SKHQRPHQD RI ³FXH FRPSHWLWLRQ´ 30 , which describes the fact that salient cues weaken the effect of less salient ones, and of confirmatory ELDV ZKLFK PHDQVWKDW³SHRSOHDUH RIWHQ WRRLQDWWHQWLYHWR QHZ LQIRUPa- WLRQ FRQWUDGLFWLQJ WKHLU K\SRWKHVHV´ 31 , or even misread adverse evidence as support for their initial hypothesis. Thus, although defective ad-hoc disclosure has been corrected, its effect might remain, as investors con- tinue to trust in it.

iv. Bounded willpower and emotional influences Both concepts offer an explanation for the mass reactions to news: people tend to conFOXGH ³WKDW WKH SUREDELOLW\ RI DQ HYHQW >«@ LV JUHDWHU LI WKH\ KDYHUHFHQWO\ ZLWQHVVHGDQRFFXUUHQFH RIWKHHYHQW´ 32 ± if, then, a suffi- cient amount of investors would have reaped benefits while investing in share x, they themselves would believe in its profitability regardless of contradicting signs6XFKDVWUXFWXUHZLOOEHQRXULVKHGE\³ERXQGHGZLOl- SRZHU´ 33 , i.e. the fact that people do for short-term well-being even things 26 Hirshleifer, Investor Psychology, p.1541.

27 Hirshleifer, Investor Psychology, p.1542.

28 Hirshleifer, Investor Psychology, p.1542.

29 see below 30 Hirshleifer, Investor Psychology, p.1543; Rabin, Psychology and Economics, p.30. 31 Rabin, Psychology and Economics, p.26.

32 Jolls et al., Behavioral approach, p.1477.

33 Jolls et al., Behavioral approach, p.1479; Rabin, Psychology and Economics, p.34.

15

which are in conflict with their long-term aims. Applied to the share mar- ket, this means: even if investors know that they run a higher risk to their long-term goal of financial security, they will engage in actions which provide them with short-term gains, e.g. risky investments. This might be reinforced by fact that portfolio considerations are subject not only to UDWLRQDOH EXW DV ZHOO WR ³HPRWLRQV WKDW FDQ RYHUSRZHU UHaVRQ´ 34 , which trigger mentally uncontrollable mechanisms. Thus, greed or the necessity WRHDUQPRQH\TXLFNO\PD\OLPLWLQYHVWRUV¶Uationality.

v. Halo effect Another effect pertinent to our discussion is the so-called halo-effect, which would transfer one outstanding characteristic of a person or thing to all other characteristics to be considered 35 . This excessive optimism often deludes people in expecting more favorable outcomes. Thus, inves- tors might be wrongly informed about one characteristic influencing the share price, say current revenue, but their final evaluation is due to the fact that they transfer this favorable evaluation to risk, capital structure and general business forecast. Thus, it would not (or, at least not only) be the defective information which GULYHV VWRFN SULFHV EXW WKH LQYHVWRUV¶ behavior upon it.

vi. Conformity effect One of the most acknowledged theories of behavioral finance is the con- formity effect, which states WKDW ³SHRSOH WHQG WR FRQIRUP ZLWK WKH MXGg- PHQWVDQGEHKDYLRUVRIRWKHUV´ 36 . Thus, if a sufficient number of people believes in the truth of a concrete share pricing of the market, the others ZLOOFRQFXUZKHWKHUWKHILUVWJURXS¶VHYDOXDWLRQLVUDWLRQDORUQot. ³3HRSOH UHFLSURFDWH >D GLVSOD\HG RSLQLRQ@ WKH\ GRQ¶W FRXQWHUDFW >LW@´ 37 . Such ef- fects are enhanced by the fact that during communication, people would ³VKDUSHQDQGOHYHO´ 38 , i.e. emphasize the main point and forget to mention details which might confuse it, or oversimplify the information given. The resulting phenomenon is based on her mentality or momentum/positive 34 Hirshleifer, Investor Psychology, p.1540.

35 Hirshleifer, Investor Psychology, p.1542.

36 Hirshleifer, Investor Psychology, p.1543.

37 Rabin, Psychology and Economics, p.21.

38 Hirshleifer, Investor Psychology, p.1562.

16

feedback-trading 39 . Applied to ad-hoc disclosure, this means that the mul- titude of investors did, in fact, not rely on the actual disclosure, but on the GLVFORVXUH¶VHYDOXation by other people.

c. Random walk hypothesis and technical analysis The random walk hypothesis, at last, claims that the share price will alter- nate around the intrinsic value of the issuing company 40 , and that those adjustments are not influenced by changes in the intrinsic value, but en- tirely random. These cycles being well researched, an analyst familiar with the technique could predict whether the prices would fall or rise ac- cording to know price change patterns.

The technical analysis, at last, assumes that not only the issuers situation, but as well the general economic performance, political events and psy- chological facts influence share prices. As those are not quantifiable 41 , technical analysis analyses past performance of a share and forecasts from those data future performance 42 .

Thus, one would have to conclude that information (which normally indi- cates the positive or negative development of the intrinsic value) does not have any influence on share prices.

d. Empirical pricing process According to financial research, on the publication of either positive or negative news, stock prices will react instant and incorporate this new piece of information into the value of the stock, which is reflected by its price. The mechanism is simple: after the disclosure of positive news, professional traders will consider those and give their bids, i.e. estimate how much more value the event published added to the share. The law of VXSSO\VKDUHV RQWKH PDUNHWDQGGHPDQGLQYHVWRUV¶ELds) will then in- corpoUDWHWKHLQYHVWRUV¶HVWLPDWHLQWRWKHVKDUHSULFH 43 . The same must be acknowledged for negative news, or a correction of positive news: inves- tors will consider the negative value, and thus some of them will decide 39 Rabin, Psychology and Economics, p.12.

40 Feldhaus, Kursbeeinflussung, p.116.

41 Perridon et al., Finanzwirtschaft, p.209.

42 Feldhaus, Kursbeeinflussung, p.117.

43 Möllers et al., Ad-Hoc-Publizität, p.46.

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