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Investors are often irrational when making decisions on how to spend their money. For instance, they may retain shares in stocks that are no longer profitable. As such, one of the prerequisites for market timing in behavioral corporate finance is that irrational investors control security prices (Baker & Wurgler, 2013). I think managers take advantage of such investors and are cautious to please them to prevent the logical ones from causing competition and arbitraging prices. Notably, it is only when informed investors compete to correct mispricing that security prices can embed fundamental values.
Furthermore, managers have several advantages that help them to identify mispricing before the investors. For instance, corporate leaders better understand their firms and any abnormally high returns occurring due to illegal or legal errands. In addition, managers can manufacture data through controlling earnings or bribing analysts to provide favourable data (Baker & Wurgler, 2013). For example, they can ask the external auditors to omit some records so that the financial data present the company as having a good overall performance. The investor may not easily discover the tricks the managers use in the financial records and then make wrong decisions.
In conclusion, I believe that for a financial market to operate efficiently, all publicly available information should reflect the security process. The rationale is that there is always a direct correlation between the monetary data conveyed in the market and how resources are allocated. Noteworthy, the investors rely on such content to make decisions on places they can place their money. Shrewd managers can take advantage of the correlation by either revealing less information about the financial records or creating data through manipulation. Moreover, they keep irrational investors close so that they can continue influencing the security prices.
Reference
Baker, M. P., & Wurgler, J. (2013). Behavioral corporate finance: An updated survey. In G. Constantinides, M. Harris & R. Stulz (Eds.). Handbook of the Economics of Finance (pp. 357–424). Elsevier Science B.V. Retrieved from Social Science Research Network (SSRN): Web.
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