Societal dynamics can compromise financial markets’ efficiency

No image found

Social biases such as prejudice influence how, why, and when financial markets react to corporate actions. New research by Ivana Naumovska from Rotterdam School of Management, Erasmus University (RSM) 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 and 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 a 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, and strategy theories on corporate communication. 

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

Dissertation abstract

In her dissertation Naumovska seeks to redirect the conversation on stock market evaluations from the more traditional economic and behavioural finance theories, by proposing a neo-behavioural perspective, which 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 on practice diffusion and organisational categories, and to strategy theories on corporate communication.

Her goal is to contribute to the knowledge of stock markets, and she takes a phenomenon-based approach by studying practices that are not commonly understood or studied by management scholars. In the first two studies she examines reverse mergers, a non-traditional way of going public. In her third study, she examines a rather extraordinary Dutch phenomenon – a codified language scale that managers use to communicate corporate performance. By studying these curious business strategies, she aims to contribute to the existing body of empirical knowledge, beyond the typical theoretical contribution. Finally, Naumovska‘s fourth study, which is a replication of a study published in a leading finance journal, lends support to the view that the body of knowledge that constitutes administrative sciences is socially constructed. As such, this study should thus be seen as part of recent efforts to broaden the role and scope for replication studies in finance and management research.

Rotterdam School of Management, Erasmus University (RSM) is ranked among Europe’s top 10 business schools for education and among the top three for research. RSM provides ground-breaking research and education furthering excellence in all aspects of management and is based in the international port city of Rotterdam - a vital nexus of business, logistics and trade. RSM’s primary focus is on developing business leaders with international careers who carry their innovative mindset into a sustainable future thanks to a first-class range of bachelor, master, MBA, PhD and executive programmes. RSM also has offices in the Amsterdam Zuidas business district and in Taipei, Taiwan. www.rsm.nl

For more information about RSM or on this release, please contact Ramses Singeling, Media Officer on +31 10 408 2028 or by email at singeling@rsm.nl.

Download Original Article (.pdf)

Share this article: