Do financial celebrities affect stock prices?

Abstract

Through the media, there seems to be general consensus that financial celebrities affect stock prices. We investigate this issue by studying the mandatory notifications of trade and the corresponding stock returns on OSE in the period from 1992 to 2008. We find that stocks that are bought and sold by these investors earn abnormal return in the short term. The immediate effect of a buy is larger than the effect of a sell, however, through the full short term event window the total effect of a sell is larger than the effect of a buy. In both cases there is an underreaction to the announcement, increasing the trading possibilities for other investors. Our findings imply that there exists a celebrity premium and that the celebrity trading, through herding in the market, affects the stock prices. The herding itself may be caused by the celebrities’ stock picking ability related to superior private information, the value of having an experienced investor as shareholder and other investors’ overconfidence in the celebrity investors. Either way, our study indicates that herding is individually rational in the shorter term, but not on an aggregate level. In the longer term we observe an incomplete reversion concerning a buy, while stocks sold by the celebrity investors continue its downward slope in terms of abnormal return.