THE BUCHAREST UNIVERSITY OF ECONOMIC STUDIES Council for Doctoral Studies Finance Doctoral School

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1 THE BUCHAREST UNIVERSITY OF ECONOMIC STUDIES Council for Doctoral Studies Finance Doctoral School THE IMPACT OF INVESTORS BEHAVIOR ON THE INVESTMENT DECISION ON THE ROMANIAN CAPITAL MARKET SUMMARY Alexandra Gabriela Țițan PhD Supervisor: Prof. univ. dr. Ion Stancu Bucharest, Romania, 2018

2 TABLE OF CONTENTS INTRODUCTION... 9 CHAPTER 1. THE CAPITAL MARKETS ORGANIZATION AND FUNCTIONING Capital markest: general aspects, definitions, description The risk profiles of the investors on the capital markets and the expected return Issues encountered by investors in their relation with management The agent theory and its impact on the investment decision on the capital market The impact of information asymmetry on the capital markets Insiders and their access to inside information CHAPTER 2. THE INVESTORS RATIONAL BEHAVIOR AND THE CAPITAL MARKETS APPLIED INFORMATIONAL EFFICIENCY About investors rational behavior About capital markets efficiency Forms of stock market informational efficiency Testing the stock market informational efficiency forms Testing the weak form market efficiency Testing the semi-strong market efficiency Testing the strong form market efficiency Literature overview Evidences of the long-term informational efficiency Evidences of the short-term efficient market hypothesis Analysis of the market efficiency on the Romanian capital market Research Testing the weak-form of the efficient market hypothesis Testing the semi-strong form of the efficient market hypothesis Conclusions CHAPTER 3. FROM THE TRADITIONAL VISION TO THE BEHVIORAL VIEW OVER THE CAPITAL MARKETS The need to turn the attention from the traditional view of the capital market to the behavioral view About the modern view on the investors behavior on the stock market Bounded rationality Prospect theory Causes of the investors behavior in the real world Literature overview regarding the investors irrational behavior

3 3.5. Investors behavior on the Romanian stock market Conclusions CHAPTER 4. BIASES IN THE INVESTORS BEHAVIOR Cognitive biases identified in the investors behavior Conservatorism Confirmation bias Representativeness Cognitive dissonance Illusion of control Anchoring and adjustment bias Mental accounting Availability bias Emotional biases in the investors behavior Loss aversion Regret aversion and status-quo bias Overconfidence Disposition effect Herd behavior Correction of behavioral biases Conclusions CHAPTER 5. MODELS USED IN DETERMINING INVESTORS SENTIMENT FOR IDENTIFYING ITS EFFECT ON THE STOCK MARKETS Literature overview on identifying the investors behavior and its impact on stock markets Investors sentiment and its impact on the Romanian capital market Methodological framework and database used Conclusion of the empirical study FINAL CONSIDERATIONS BIBLIOGRAPHY APPENDIX LIST OF ABBREVIATIONS AND ACRONYMS LIST OF TABLES LIST OF FIGURES/GRAPHICS LIST OF APPENDIX

4 KEYWORDS Capital market Rational behavior of investors Informational efficiency of the capital market Calendar effect Behavioral vision of the capital market Cognitive biases in investor s behaviour Emotional biases in investor s behavior Investors sentiment The principal components analysis 3

5 SHORT SUMMARY OF THE DOCTORATE THESIS The fundamental objective of the present work is to determine a measure of investors' sentiment at a given moment in time and to identify the way in which this sentiment affects the Romania stock market. In order for this to be possible, we first discussed general aspects related to capital markets, such as the presentation of the capital markets main features, evolution of the global capital market and the importance that shares liquidity and listed companies transparency have on the investor confidence acting on capital markets. Furthermore, we discussed about the traditional finance theory according to which investors are rational, and capital markets are informationally effecient. Following the empirical studies conducted, we concluded that the weak form of the efficient market hypothesis of the Romanian capital market is supported by the empirical study conducted between January 2010-March 2018, while the study regarding the calendar effect concluded about the existence of significantly lower returns on Mondays compared to the average return on other days of the week and of significantly higher returns on Thursday as compared to the average return on other days of the week. In the end, after discussing descriptive aspects regarding the investors irrational behavior and the cognitive and emotional biases, we conducted an empirical study at the level of the Romanian capital market by constructing a composite index - a proxy for assessing the investor's sentiment on the general return of the capital market and the return of the main industries whose companies are listed on the Bucharest Stock Exchange. The result of this study reveals that, on one hand, the current investors sentiment is significant and positively correlated with the BET index s return, as well as with the average return of each industry analyzed, and on the other hand, the BET return is positively correlated with the current period investors s sentiment, but inversely correlated with the previous period s sentiment. The present paper is the first work that identifies the investors s sentiment on the Romanian capital market in quantitative form and reveals that, indeed, this sentiment has a strong impact over the capital market. This paper is addressed in particular to individual investors, but also to institutional ones, investment analysts and portfolio managers, supervisory authority and to all other participants in the Romanian capital market for which it is essential to understand how the evolution of the prices of the listed shares evolves and which are the underlying causes of these developments. 4