Accounting, Behavioral Finance And Other Finance Theories Assignment Sample

Introduction of Accounting, Behavioral Finance And Other Finance Theories Assignment

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In order to study Behavioral finance and other finance theories, behavioral finance is a financial study that affects psychology on investors and lenders and financial marketing. In accounting terms financial theory is the paper that discusses and defines the impact of company decisions made by the financial management. The theory will be either Modern portfolio, Arbitrage pricing theory or anyone. In the study of financial theory, there are five types of theory. In order to study it will discuss Behavioral finance theories and other finance theory and their overreaction and overreaction, critically discuss the empirical evidence against under reaction and overreaction, and discuss the methodologies that have been followed for the methodology and their limitations and finally the conclusion.

Main Body

A. Behavioral finance and other finance theories

Comparison of Behavioral finance theory and other financial Theories

In order to compare between Behavioral financier theory and other finance theory, the behavioral finance theory is a study of financial marketing behavior. Companies make financial decisions based on these theories. Behavioral theories help to explain and describe the company's financial environmental behavior. Investment is good, but most of the people do invest in stock, bond, olds and properties and these are risky moves. However, most of the time behavioral finance and traditional finance helps to influence the people to take the position on these stocks and bonds. Traditional finance investors do not make decisions based on emotions. In traditional finance, investors collect the data or receive the data they have, and these dates are support the investor's decision. In the behavioral finance market, the investors make decisions based on emotion. In the behavioral finance market, the investors make decisions on lack of information, decision on fear, and sometimes in overconfidence and sometimes they follow what others do, and sometimes on past experience. As expressed by the author Seventy et al (2018) in traditional finances, the investors received perfect information and the investors received unlimited data from the outsource. As stated by the author Quiet (2022) after collecting all the data the traditional investors process this data carefully and thereafter the investors invest in the market.

In the Behavioral finance market, the investors are not collecting the investment related dates, and they will not have proper investment related knowledge and they do not process the data. Traditional finance markets represent the efficient and actual financial market’s value. In the traditional finance market, the investors have self-control. In the Behavioral market, the competitors have no self-control, and sometimes the data of the behavioral market represent inefficient and inaccurate market value. In behavioral finance the markets are inconsistent and the prices of stock falling and rising. In comparison to modern finance and behavioral finance, the standard finance theory representing the asset class mix would give a good expected return. Whereas behavioral finance represents investment on an emotional basis. In the modern portfolio market, the investors generally invest in assets for maximum rate of return.

In these theories, the investors have normal risk, and investors will prefer the lower risky portfolio. However, in behavioral finance, the investors do not have proper investment related data, that is why in this market the expected risk is very high. An efficient market represents the efficient market and they have no more space to make profit by investing. In order to compare the behavioral finance and efficient market. The efficient market shows the accurate and fair prices. In addition, on the other side the behavioral market does not show the accurate and fire price value. In an efficient market, the investors hold in both the long term and short term. In the efficient market, it provides the attractive market share price. As opined by Anastasia (2021) and on the other side the behavioral finance do b\not provide an accretive market share value. In comparison to equilibrium theory, this is a market there they represent the demand and supply in an economy (Bertheussen et al 2019).

Explanation of overreaction and under reaction

As stated by the author Quiet (2022) in finance and investing a high emotion represents an overreaction. When securities, stocks and bonds or companies' shares become aggressively oversold or overbought due to pressure or psychological response. As opined by the author Anastasia (2021) Overreaction crashes and bubbles can be examples of overreaction. The efficient financial market assumes that they might be affected by emotional basis and cognitive. Currently many funds are used in behavioral finance to break the portfolio especially in small capital markets and inefficient markets. Bubble is a form that starts raising the price of assets to attract investors. An under reaction describes the people who are attached with the old information. An under reaction meaning the investors who do not react to the enough data. In the under-reaction market, the stock prices react to the news of announcement\in\mint. If it is good news from an investment view then the price keeps trending up and if it is bad news from an investment perspective then the price keeps trending down and it creates a negative reaction. As expressed by the Tilakasiri and Lashing (2021) in under reaction some principles apply to bad news. In an efficient market, not all investors are always rational. Most of the time under reaction is caused by anchoring.

B. Discussion about empirical evidence

Overreaction and under-reaction

Overreaction occurs when the decision maker responds in a disproportionate way. The overreaction is a familiar and facial expression, which arises due to changes in the reactions of the stock value. As stated by the author Monad Tyke (2022) it is only “greed or fear” where the security and the investments are led by these feelings. Investors overreact, as they are more compatible in lending and buying of shares, which is the new cause of the security. The overbought shares or stock and the oversold returns up to the intrinsic values can be ascertained through these reactions. In this segment the invests are always rational as they are computing the overall stock value according to the choices and efficient stock and market hypothesis. 

Under reaction refers to the information that the investors do not react to. Investors diagonally recognize the adequate reaction to the estimated stock value. Instead of that, the investors pose a different challenge to enhance the “efficient market hypothesis”. As opined by the author Luger (2018) generally the under reaction occurs when the pieces of the stock reduces and the slight changes show the dynamics of the money market. It produces momentum in the stock exchange values. The post earnings and their announcement are done at early balsa to involve a new concept where the firm can lead to the profit amenities of these over and under reactions in the stock levels (Tangjitprom et al 2019).

Over the past period, it has been readily analyzed those 35 stocks has been performed in the market on an average of 19.6% which has led to overreaction and under-reaction for the decision makers in a large manner. Emotional response regarding security has been also integrated related to stock and other investment in a huge basis.

Graphical evidence of UK stock market

(Source: Sensoy 2019)

In the current situation of the world, it is very hard to define human behavior or prediction. In the current market inefficiency and instability is a factor of behavior. According to financial behavior, it is irrational to make the decision. The investment related decision, portfolio decision is quite effective due to behavior. After the 2008, global financial crisis investor's behavior is considered to change in the stock market. In this study, many reports have been conducted on the impact of behavior. In the last 16 years, some studies came with complementary explanations with successful performance. As expressed by the author Nitpick, et al (2019) As stated by the author Sensory (2019) a new approach to measure the market risk by allowing time varying betas. As the author advises to upgrade the microstructure basis in the employed method for return. Especially for a long time. In order to empirical evidence, it has two types of evidence: qualitative and quantitative evidence. In empirical research, it is a collection of unbiased data. An extreme emotion is a response to overreaction. Most of the time investors overreact to cause the security and after either, they oversold or overbought. The efficient market assumes that investors are affected by emotional basis or cognitive and (Marianim et al. 2019)

Graphical evidence of stock market overreaction and under-reaction

(Source: Tiekwe, 2022)

 Most of the time overreaction and under reaction of prices happen. Most of the time under reaction is caused by anchoring the anchoring idea can cause to look the stocks that are undervalued and they missed the chances to earn profit. In the financial economy, it is a highly controversial issue that extensive research provides empirical evidence. A good number of papers help to identify the market price under reaction to events. If the news is good from an investment perspective, then price will keep trending up after the positive reaction. On the other hand, if the news is bad as investment view, then prices will keep down after the reaction. A good number of reports provide a reaction on price under reaction (Paving, 2021). 

C. Methodologies for overreaction and under-reaction:

Overreaction:

In this project, the study follows the secondary research method to evaluate the overreaction and under reaction of the decision makers regarding market performance. As per the view of Battiston, et al. (2021) future stock or fund does not require any net investment; the investment must be conducted in a short time period that will decrease the risk of losses in investment. The abnormal return of the stock future contract is not different from its actual value. Beside this descriptive research strategy has been used to test the decision maker’s reaction about overreaction and under-reaction in a large manner. Qualitative method of testing has been integrated by the research by collecting data from the past research with evaluating the security and stock fluctuation of the market.

Overreaction indicates an excessive demonstrative for any kind of new information or new element. As suggested by Cai et al. (2019) in finance and stock market overreaction means any sentimental concern to a fund such as stock or long-term fund or short-term fund. Investors or stockholders of any company overreacted to global news; as a result, they become excited about the news. The holder needs to start analyzing whether or not to hold the share if it will increase in the future or if they want to sell the share at cost to cost, if it decreases in future and the holders will not get even intrinsic value. Hence over-reaction behavior can be also tested by graph-based testing methods with equivalence partitioning and integrating boundary value analysis in a huge basis. Comparison testing will also be the best way to understand the overreaction and under-reaction behavior of the decision makers with orthogonal array testing.

An overreaction occurs in the financial market when stock or fund extremely oversell or overbuy due to people's assumptions. In the stock market companies can hold the share. But after buying the share it seems the value of the particular fund or stock has increased, the holders got excited and invested more of the share in the particular fund, but after reinvesting the market it seems the price of that particular share has been decreasing. In that time the holder becomes overreacted and sells the total share than the intrinsic value, as a result the investor gains losses after overbuy. There are some methods to reduce the overreaction, those are:

• The holder has to understand the risk of tolerance
• Holders have to keep enough liquidity in portfolio
• Using the asset allocation strategy.

Under reaction:

Under-reaction indicates that the stockholder of the market does not give such attention to the investing information. As opined by Cockcroft, and Russell, 2018 if the stock holder does not give much concern about the investing information, this causes an under reaction in the stock market. In this under reaction project, the study has been following the Secondary Method of Research. The research can measure the daily return of the investment in the stock market by the contract using the amount difference between the closing amounts of the past day. The differences between the upcoming average price and the closing amount of the particular day because future stock prices create a lot of noise at the high and low of daily average-based computation. The average price of measuring the under reaction also has trading implications. As cited by Mburayi, and Wall, 2018. By the method of CARs in the observation and test periods, the study can evaluate the past stock performance that is how the stock has been performing, like profitable or non-profitable. Beside this the research of CAPM and the Fama method, it researches on under reaction further test as well as focusing on the last 6-month strategy of stock market. It will check the stock return in future and options. After this the researchers used the Post-Earnings Announcement Drifts methodology, to see the reaction of post earnings of the decision makers. Hence, the researcher evaluates the fund and stock decreasing prices of the market. Accordingly, this methodology was used to test the reflection in under reaction in the stock market. It can analyze that the performance is connected with fund specific news. The research focused on earning news as well as continuation in stock returns. The researchers also followed the Method of Standardized Unexpected Earnings” (SUEs), which is also the proper test to understand the under reaction. It is computed by earnings surprise and scaling it by standard deviation as well as comparing actual earnings with earnings forecasted on previous earning rate per share.

D. Analysis and limitation of followed methodology:

Secondary methods of analysis indicate that using the secondary data in the particular research. This method saves time as well as money and avoids duplication of research. Besides the good site, it has an impact too, such as it may not answer the researcher’s actual questions or that particular content information that researchers like to have the most.

As per the narrator Han, J, Pan, and Shi, 2018, Qualitative testing methods indicate the detailed verification of the data used in the project. It has a seeking technique to understand the smaller details. It defined a clear view of the project. The limitation of the Qualitative methods is it can't give a statistical view of data collection. It can lose the data from the project as well as it may require various sessions to analyze the data.

Equivalence partitioning and integrating boundary value analysis is a testing method of the boundaries between the partitions. It helps to divide the set of test conditions in a various partition.

The impact of the Equivalence partitioning and integrating boundary value analysis is that it is not able to test the case input value like 1 and 0.

CAPM and the Fama method indicate the asset pricing as well as the expansion of the asset pricing model. This will measure the risk of asset pricing. The biggest impact of this method is that it is difficult to determine beta in a project. As expressed by Engstfeld et al. (2018), it can be difficult for the method to calculate the accurate beta value of the investors. It will give the approximate value they have invested.

In order to analyze the comparison testing, it is a file and database against the main result. The comparison testing is capable of making a difference between the main result and the expected result. It helps to analyze the weakness and strength of a specific product in comparison to the same product. This method cannot contemplate cost levee price change. As stated by the author Antic Bottazzi and Giachini (2022) The comparative statement does not help to change the level of price. In this method, it is very difficult to ascertain the current marketing trend. Sometimes it provides the wrong information. As stated by the author paving (2021) it is very difficult to change or modify. One of the methods is value analysis, it is a systemic view of production, product design, purchasing and decreasing the production cost. Value analysis helps to switch the low coat products. There are five steps to analyze the value analysis; first collect information second analyze the project function third new ideas for improvement fourth apply this idea and develop them and last present improvement. The main aim of value analysis is to make products and processes easier. As opined by the author Monad Tyke (2022) the value analysis is not suitable for a Boolean variable. The most common limitation of value analysis is, it blocks implementing plans of value analysis and lot of difficulty was noticed in meeting and getting consensus (Pokavattana et al. 2019)

 Conclusion

In order to study accountancy and finance, it has been critically discussed about the behavioral finance theories, other theories, and their comparison. It has also been discussed about behavioral overreaction and under reaction. In other financial theories, it has been discussed about standard portfolio, traditional finance and other financial theories. In traditional markets, the investors follow the perfect investment related information, and they do not invest emotionally. They process all the data and thereafter they invest. In the behavioral market, the investors do not have proper investment related information and most of the time they invest aggressively and emotionally. This is quite not good for the and for the market. It has been critically analyzed the following methods and their limitations. In order to analyze it has been discussed about equivalence partitioning and integrating boundary value analysis and Comparison testing. In comparison testing, it shows the comparison of two similar products and comparing file and database to find the actual result. In value analysis, it is a view of purchasing production and design to reduce production cost and it is objective to simplify processes and products. In addition, it has been discussed the empirical evidence and their overreaction and under reaction. Up gradation of microstructure is helpful for high return.

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