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On the Rationality of Institutional Investors: The Case of Major Industrial Accidents

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  • Cécile Carpentier
  • Jean-Marc Suret

Abstract

To determine if institutional investors act more rationally than individual investors, we examine the stock market price drop following 173 major industrial accidents from 1959 to 2017. In most cases, this drop, generally considered excessive, rapidly reverses. Using meta-analysis techniques, we distinguish events likely to trigger a large negative mid-term market reaction (potentially destructive events) from other events. For firms with large institutional holdings, we show that the market drop following potentially destructive events (potentially nondestructive events) is significantly larger (smaller). This is consistent with the hypothesis that investors’ potential irrational reaction depends on their sophistication.

Suggested Citation

  • Cécile Carpentier & Jean-Marc Suret, 2021. "On the Rationality of Institutional Investors: The Case of Major Industrial Accidents," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 22(3), pages 289-305, July.
    • Handle: RePEc:taf:hbhfxx:v:22:y:2021:i:3:p:289-305
    DOI: 10.1080/15427560.2020.1774593
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    Cited by:

    1. Ülkü, Numan & Ali, Fahad & Saydumarov, Saidgozi & İkizlerli, Deniz, 2023. "COVID caused a negative bubble. Who profited? Who lost? How stock markets changed?," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    2. Rafał Wolski & Monika Bolek & Jerzy Gajdka & Janusz Brzeszczyński & Ali M. Kutan, 2023. "Do investment fund managers behave rationally in the light of central bank communication? Survey evidence from Poland," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 15(5), pages 757-794, February.
    3. Ding, Rui & Guo, Jintong & Zhang, Min, 2024. "Practice a poker face: Manager emotion and investor sentiment," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).

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