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.