PhD Defence: Socially Situated Financial Markets - A Neo-Behavioral Perspective on Firms, Investors and Practices

Social biases such as prejudice influence how, why, and when financial markets react to corporate actions. New research by Ivana Naumovska from ERIM unpacks and reveals the sociological factors that affect financial markets and influence their performance.

In her dissertation Socially Situated Financial Markets, A Neo-Behavioral Perspective on Firms, Investors and Practices, Naumovska shows that financial markets are subject to ethnic and racial prejudice, as well as, discrimination. The research suggests that in 2011 - 2013, investors used prejudiced reasoning to value Chinese firms going public through a ‘reverse merger’. In addition, the media acted discriminatorily against Chinese reverse mergers. Their reports of corporate misconduct linked to Chinese firms were disproportionate relative to reports of misconduct in reverse mergers in the USA and other countries. Naumovska shows that societal dynamics can compromise market efficiency, and demonstrates that American investors often assume Chinese companies listing reverse mergers in the USA are fraudulent.

In her dissertation Naumovska seeks to redirect the conversation about stock market evaluations, away from the more traditional economic and behavioural finance theories, by proposing a neo-behavioural perspective that views financial markets as socially situated. Specifically, she combines theoretical arguments from organisation and sociological theories, as well as psychology and linguistics, to explain stock market dynamics.  She pursues specific research questions emerging from this framework and unpacks the mechanisms by which social-psychological and institutional factors influence stock market evaluations of firms and their practices. In doing so, she advances and contributes to organisational theories about practice diffusion and organisational categories, as well as, strategy theories on corporate communication.

Naumovska hopes businesses can learn from her theoretical and empirical examination of this issue, at least to reduce the certainty with which such blatantly discriminatory evaluations are being made.

Ivana defended her dissertation in the Senate Hall at Erasmus University Rotterdam on Thursday, 18 September 2014. Her supervisors were Professor Pursey Heugens and Professor Abe de Jong. Other members of the Doctoral Committee were Professor Edward Zajac (ERIM), Professor Violina Rindova (UTexas), Professor Taco Reus (ERIM), Professor Peer Fiss (USC Marshall), Professor Rodolphe Durand (HEC Paris) and Professor Mathijs van Dijk (ERIM).

About Ivana Naumovska

Ivana Naumovska is a PhD candidate in the department of Strategic Management and Entrepreneurship at Rotterdam School of Management, and a visiting PhD at the department of Management and Organization at Kellogg School of Management. Ivana started her PhD in 2010, after she graduated (cum laude) of the research master program (MPhil) in Finance at the Erasmus Research Institute of Management (ERIM). Prior to joining ERIM, she obtained a Bachelor in Financial Economics (cum laude) in 2007 form Utrecht School of Economics.

Abstract of Socially Situated Financial Markets: A Neo-Behavioral Perspective on Firms, Investors and Practices

This dissertation begins with three interrelated premises: (1) that financial markets are socially situated, (2) that investor sentiment is socially constituted, and (3) our understanding of firm behavior vis-à-vis markets and investors will benefit from an explicit consideration of premises (1) and (2).  This combination, which I term a neo-behavioral perspective, seeks to go beyond the methodological individualism of financial economics and behavioral finance to examine how a variety of institutional and socio-psychological factors affect firm, investor, and financial market behavior.  Specifically, my dissertation employs an interdisciplinary and phenomenon-driven approach to study firms’ adoption of several novel corporate practices, along with the financial market (mis)evaluations of these firms and their practices.

The first two studies examine what have been termed “reverse mergers”, which represent a non-traditional pathway for private firms to become publicly traded. The first study addresses the diffusion of this novel practice, and suggests that diffusion and legitimacy may not proceed in tandem; in fact, I show how diffusion can be a source of contestation and a threat to legitimacy. The second study advances the notion that the degree to which investors engage in firm-based ethnic stereotyping and prejudiced reasoning is a threat to firms’ legitimacy and stock market evaluations. The third study investigates the conditions under which the use of ambiguous language in investor communication can generate positive market reactions. I do so by examining a unique Dutch phenomenon: a codified language scale that managers use to communicate corporate performance. The fourth study is a replication and critique of a study published in a leading finance journal, and lends support to recent efforts aimed at broadening the role and scope of replication studies in finance and management research.

Photos: Chris Gorzeman / Capital Images