2018- Working Papers: Finance, Accounting and Insurance

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A behavioral theory of the effect of the risk-free rate on the demand for risky assets, 16 pp.
Y. Ganzach and A. Wohl
(Working Paper no. 2/2018) 
Research no.: 03660100

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We suggest a behavioral perspective for the demand for risky assets (DRA) in which the risk-free rate affects this demand: the lower the risk-free rate the higher the demand for risky assets. This perspective is based on the idea that changes in return exhibit decreasing sensitivity, that is, the impact of a change diminishes with the distance from the status quo (or reference point). We begin by demonstrating that when the risk-free rate decreases, DRA increases even among sophisticated subjects. We then provide support for our behavioral model in three experiments in which the risk-free rate is manipulated and demand for risky assets is measured. Experiments 1 and 2 rule out alternative explanations, demonstrating that decreasing sensitivity underlies, at least in part, the effect of the risk-free rate on DRA. Experiment 3 demonstrates the role of decreasing sensitivity when returns are presented in terms of monetary payoffs rather than interest rates.

Cost stickiness as a consequence of capital market signaling, 38 pp.
E. Einhorn and E. Shust 
(Working Paper no. 5/2018) 
Research no.: 01480100

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Ample empirical evidence documents the tendency of costs to increase more when revenues rise than to decrease when revenues fall by an equivalent amount. The study offers a capital market oriented explanation for this asymmetric cost behavior, which is known in the literature as cost stickiness, by highlighting the informational role of managerial decisions regarding resource adjustment in response to demand shocks. The suggested explanation is established within a theoretical framework that demonstrates how capital market considerations induce managers of publicly traded firms to utilize their observable resource adjustment decisions as a signaling device through which they convey their private information to the capital market investors. Our analysis indicates that this signaling mechanism serves managers to promote the stock price of their firm at the expense of distorting the optimal cost structure of the firm in a way that triggers a cost stickiness pattern.

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