GM1017, Behavioural Corporate Finance
Michael Kirchler
Faculty Board of the School of Business, Economics and Law
GM1017, Behavioural Corporate Finance,
7.5 higher education credits
Dr. Michael Kirchler
Department of Banking and Finance, University of Innsbruck and Centre for Finance,
University of Gothenburg
michael.kirchler@uibk.ac.at
http://www2.uibk.ac.at/ibf/mitarbeiter/kirchler.html
Course Outline
This course covers a broad range of issues in behavioral finance. Its central theme will be the
“efficient market hypothesis” (EMH), one of the cornerstones of modern finance. Special
emphasis in this course is given to experimental studies. To deepen the knowledge and
understanding of the functioning of financial markets, both paper and pencil and
computerized market experiments are run during the course with near-to-reality market
designs. In particular, the course consists of the following connected themes which all are
related to the efficiency of markets.
A first part investigates the drivers of bubble formation on financial markets. Therefore,
experiments will be run to detect environments which fuel or diminish bubbles on asset
markets.
Furthermore, the course sheds some light onto the performance of different groups of
investors like insiders, mutual fund managers, etc. and thus covers the value of their private
information. It will be investigated whether they are able to outperform the market which
would mean that the market prices do not fully incorporate their information. Related to this,
the course will also cover the forecasting performance of experts in general and on financial
markets. Finally, experiments with asymmetrically endowed investors will be run and
analyzed in class to observe differences in returns and behavior among the different trader
groups.
Another topic centers around the discussion of implementing a transaction tax on foreign
exchange markets (so called “Tobin Tax”). By taking a look at recent studies and by running
own experiments, questions on the impact of a Tobin Tax on market volatility, market
efficiency and trader behavior will be answered.
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GM1017, Behavioural Corporate Finance
Michael Kirchler
Learning outcomes
Upon completion of the course you will
1. have a good understanding of the functioning of markets and the mechanism of price
formation.
2. have a good understanding of the efficiency of real-world financial markets and its
implications.
3. be able to replicate other and conduct own studies on market efficiency.
Grading
1. A written exam (learning outcome 1 and 2) which accounts for 60% of the grade. At
least 50% of the total points of the exam must be achieved to get a positive grade in
the course.
2. One group paper (Case study) which includes the group’s empirical or experimental
studies on market efficiency (max. 3 students, see below for details) (the third learning
outcome).
Details of the Course (9:00 a.m. – 12:30 a.m.)
1.2.2010: Session 1: Overview on Market Efficiency; Room ???
 Overview
 Experiments with paper and pen
 Three forms of market efficiency
3.2.2010: Session 2: The Value of Information on Financial Markets; Room ???
 The value of information – experiment and literature
 Three forms of market efficiency
 Expert Performance in General and on Financial Markets
5.2.2010: Session 3: Bubbles I; ???
 Expert Performance in General and on Financial Markets
 Bubbles in asset markets – experiment and literature
16.2.2010: Session 4: Bubbles II; ???
 Bubbles in asset markets – experiment and literature
17.2.2010: Session 5: Tobin Tax; ???
 Financial transaction taxes; “Tobin Tax” – experiment and literature
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GM1017, Behavioural Corporate Finance
Michael Kirchler
19.2.2010: Session 6: Summary and Conclusion; ???
 Summary
Case Study
Work together in groups of at maximum three. Try to find a research question on market
efficiency (with special emphasis on experimental research questions) and conduct the study
according to the principles of scientific work.
The case study should be written like a “short” scientific paper and hence should serve as a
good practice for writing your master thesis. The case study should contain the following
sections:
1) Introduction and related literature
Here you should briefly state what you are willing to look at (a very short summary of
your research question) and you should shortly mention and explain related literature.
Furthermore it is common practice in scientific papers to include a brief paragraph
with your main findings that the reader already knows about the contribution of the
paper from the beginning. The introduction is written in present tense (the part on
related literature may sometimes also be written in past tense).
2) Research question and method
The research question(s) should be deduced from existing literature which you
presented in Section 1 and should be stated clearly. Furthermore you should explain
your empirical model you test your research questions with in the subsection
“method”. If you write your case study on experiments we conducted, you must also
include a subsection on “model description” and explain the structure of the
experimental market (see the experimental papers in the references of this course).
This section is written in present tense.
3) Results
Based on the research question, the results should be presented. Statistical tests should
be traceable with the inclusion of p-values, sample size n, etc. The results section is
written in present tense.
4) Conclusion and discussion
This section should contain a brief summary of the research question, the method
applied and the most important results. In the last paragraph it also makes sense to
relate the results to existing literature and to discuss shortly the practical implications
of your study. Writing in past tense is best suited for the summary of results. When
discussing the results, present tense should be used.
Of course, the case study must also include a full list of references and, if necessary,
an Appendix with additional material. In total, the number of pages should be in the
range of 10 to 15 (excluding the reference list and Appendices).
Literature
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GM1017, Behavioural Corporate Finance
Michael Kirchler
General Literature on Market Efficiency
Barber, Brad M., Terrance Odean. 2000. Trading is hazardous to your wealth: The common
stock investment performance of individual investors. Journal of Finance 55(2): 773806.
Carhart, Mark M. 1997. On the persistence in mutual fund performance. Journal of Finance
52(1): 57-82.
Fama, Eugene F. 1991. Efficient capital markets II. Journal of Finance 66: 1575-1616.
Malkiel, Burton G. 2003. The efficient market hypothesis and its critics. Journal of Economic
Perspectives 17: 59-83.
Malkiel, Burton G. 2005. Reflections on the efficient market hypothesis: 30 years later. The
Financial Review 40: 1-9.
Literature on Expert Performance
Törngren, Gustaf, Henry Montgomery. 2004. Worse than chance? Performance and
confidence among professionals and laypeople in the stock market. The Journal of
Behavioral Finance 5(3): 148-153.
Literature on Bubbles in Asset Markets
Haruvy, Ernan, Charles N. Noussair. 2006. The effect of short selling on bubbles and crashes
in experimental spot asset markets. Journal of Finance 61(3): 1119-1157.
Kirchler, Michael. 2009. Underreaction to fundamental information and asymmetry in
mispricing between bullish and bearish markets. An experimental study. Journal of
Economic Dynamics and Control 33: 491-506.
Noussair, Charles N., Stephane Robin, Bernard Ruffieux. 2001. Price bubbles in laboratory
asset markets with constant fundamental values. Experimental Economics 4: 87-105.
Dufwenberg, Martin, Tobias Lindqvist, Evan Moore. 2005. Bubbles and experience: An
experiment. The American Economic Review 95(5): 1731–1737.
Hommes, Cars. 2010. The heterogeneous expectations hypothesis: Some evidence from the
lab. Journal of Economic Dynamics and Control: forthcoming.
Literature on the Value of Information
Huber, Jürgen, Michael Kirchler, Matthias Sutter. 2008. Is more information always better?
Experimental Financial markets with cumulative information. Journal of Economic
Behavior & Organization 65: 86-104.
Kirchler, Michael. 2010. Partial knowledge is a dangerous thing - On the value of asymmetric
fundamental information in asset markets. Journal of Economic Psychology 21: 643658.
Literature on the Tobin Tax
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GM1017, Behavioural Corporate Finance
Michael Kirchler
Hanke, Michael, Jürgen Huber, Michael Kirchler, Matthias Sutter. 2010. The economic
consequences of a tobin tax - an experimental analysis. Journal of Economic Behavior
and Organization 74: 58–71.
Pellizzari, Paolo, Frank Westerhoff. 2009. Some effects of transaction taxes under different
microstructures. Journal of Economic Behavior and Organization 72: 850–863.
Spahn, Paul. 2002. On the feasibility of a tax on foreign exchange transactions. Report to the
Federal Ministry for Economic Cooperation and Development, Bonn.
Further Reading
Anderson, G. (2008), Cityboy: Beer and loathing in the Square Mile. London. Headline
Publishing Group.
Bernstein, P.L. (1992), Capital ideas – The improbable origins of modern Wall Street. New
York, London, Toronto. The Free Press.
Kneisley, B., (2009), The Wall Street Casino – Efficient, passive investment advantages for
today’s investors. Toledo/Ohio. Technical Financial Publishing.
Levitt, S.D., Dubner, S.J. (2006), Freakonomics – A rogue economist explores the hidden side
of everything. London. Penguin Books.
Mandelbrot, B., Hudson R.L. (2004), The (mis)behavior of markets. A fractal view of risk,
ruin and reward. New York. Basic Books.
Ormerod, P. (2007), Why most things fail. Evolution, extinction and economics. New Jersey.
John Wiley & Sons.
Rolfe, J., Troob, P. (2000), Monkey Business: Swinging through the Wall Street Jungle. New
York. Warner Books.
Rosenthal, J.S. (2006), Struck by lightning. The curious world of probabilities. Washington
D.C. National Academy Press.
Taleb, N.N. (2007), Fooled by randomness. The hidden role of chance in life and in the
markets. London. Penguin Books.
Taleb, N.N. (2008), The Black Swan. The impact of the highly improbable. London. Penguin
Books.
Waldrop, M.M. (1992), Complexity – The emerging science at the edge of order and chaos.
New York, London, Toronto. Touchstone.
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