Communication, behavioural biases and financial markets ; a case study of Tesla Inc.
Abstract
This aim of this research is to evaluate the effect of corporate communication on setting
investor expectations about a stock´s fair valuation. By means of a case study analysis of
the Tesla Inc. stock price since the initial public offering (IPO), it seeks to empirically
explore the extent to which investor sentiment was influenced by fundamentals or by
behavioural aspects. The increased internet connectivity, the additional information
available to economic agents or investors (Stigler, 1961) as well as higher transparency
(Leff, 1984) of companies has impacts in the context of the efficient market hypothesis
(Fama, 1970) and Behavioural Finance (Odean 1998a, Kahneman and Tversky 1973,
1979, Scharfenstein and Stein 1990). The methodology employed is positivist, utilizing
statistical time-series techniques/models on the basis of Arbitrage Pricing Theory (Ross,
1976), Vector Autoregression (VAR), Vector Error Correction Models (VECM) and
Impulse Response Functions. The data sources, by means of web-crawlers, algorithms
and manual interpretation of media, operationalize the sentiment indicators required
(Nisar and Yeung, 2018). Accordingly, it seeks to determine whether stock price
movements were pre-dominantly explained by aggregated or individual sentiment
variables representing a meaningful tool to proxy emotions and social media in response
to communication. Through a deductive approach, patterns and theoretical underpinnings
are sought to be explained by communication-driven deviations from Tesla Inc.´s intrinsic
value. Ultimately, it seeks to re-emphasize that traditional finance theories require the
adoption of behavioural proxies to appropriately capture short-term movements as
informational advantages can still yield additional results. In so doing, this research
evaluates indicators of selected behavioural biases associated to communication that may
impact the value of incorporating fundamental information and help explain changes in
share prices. Therefore, this research is geared to establishing an understanding of and
extent to which sentiment determinant corporate communication should be focused and
provide a basis to be replicated for similar case studies.