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Journal of Business Economics
Published in: Journal of Business Economics 2/2015

01-02-2015 | Original Paper

Key investor documents and their consequences on investor behavior

Author: Torsten Walther

Published in: Journal of Business Economics | Issue 2/2015

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Abstract

This paper is motivated by the regulatory step of the European Union to introduce a new information disclosure document called Key Investor Documents (KID). With the help of an online experiment, this paper examines the effectiveness of these documents concerning the regulatory framework’s goal to present potential investors the information in a way they can understand. In addition, we examine the impact of these documents on investors’ diversification behavior. We find that investment funds’ KIDs are perceived as being more informative, comprehensible, and helpful than their respective Prospectuses. Still, many investors do not understand the information provided in these KIDs. We show that KIDs lower the probability of information overload and, as a consequence, the probability of diversifying in a naïve manner. We argue that this effect is not necessarily beneficial for retail investors since it might lead to stock picking behavior and unutilized chances of diversifying the portfolio.
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From January 2013, the Zeitschrift für Betriebswirtschaft (ZfB) is published in English under the title Journal of Business Economics (JBE). The Journal of Business Economics (JBE) aims at encouraging theoretical and applied research in the field of business economics and business administration, promoting the exchange of ideas between science and practice.

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Appendix
Available only for authorised users
Footnotes
1
Both Benartzi and Thaler (2001) and Simonson (1990) call this behavior a heuristic.
 
2
These documents can be regarded as the German implementation of “Key Investor Documents” for investment products besides investment funds.
 
3
Results between online and laboratory experiments might differ. However, there is a lot of evidence that participants’ reactions, in particular on a response scale, differ only slightly (see, e.g., Krantz et al. 1997; Krantz and Dalal 2000; McGraw et al. 2000). The impact of possible multiple submissions (see, e.g., Reips 2002) is reduced by prohibiting multiple participations using the same IP address.
 
4
This procedure is in line with the two-fund separation theorem. The theorem suggests a separation of the decision which share is invested in risky assets and the decision on the allocation between different risky assets.
 
5
Charness et al. (2013) provide a review of merits and weaknesses of different mechanisms for risk elicitation.
 
6
See Druckman and Kam (2011) for a discussion of experimental studies with student subjects.
 
7
As a robustness check, we excluded subjects that belong to the lowest quartile with respect to the time spent on the allocation decision. The conclusions do not change.
 
8
As these two variables are highly correlated (pairwise correlation 0.80), we redid all our multivariate analyses with a variable that combines both scales. The results are not affected.
 
9
Unless otherwise stated, t tests are applied to test the difference between different groups. There are some crucial assumptions underlying this test. However, de Winter and Dodou (2010) show that a t test performs as well as non-parametric procedures (e.g., Mann–Whitney–Wilcoxon) when dealing with Likert scales. Besides that, t tests are more convenient and widespread (see, e.g., Sachse et al. 2012; Wang et al. 2011).
 
10
Values smaller or equal to four are taken into account.
 
11
Note, however, that according to the Kolmogorov–Smirnov test, the hypothesis of equality of distributions cannot be rejected.
 
12
Note that the treatment effect KID is still significant at the 1 %-level if all variables are integrated in a single regression model (not reported).
 
13
Note that the average allocation of about 45 % into the risk-free asset is smaller than the one observed in the experiment with two risky assets. This outcome is in line with Benartzi and Thaler (2001) who find an increase in the allocation into equity as the number of funds offered increases. As in the basic experiment, the share invested in the risky assets is highly correlated with the subjects’ willingness to take financial risk (0.52, p < 0.01).
 
14
Based on the e-mail address (which we received from more than 90 % of the participants) nine subjects had also participated in the basic experiment. Excluding these participants does not influence our conclusions.
 
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Metadata
Title
Key investor documents and their consequences on investor behavior
Author
Torsten Walther
Publication date
01-02-2015
Publisher
Springer Berlin Heidelberg
Published in
Journal of Business Economics / Issue 2/2015
Print ISSN: 0044-2372
Electronic ISSN: 1861-8928
DOI
https://doi.org/10.1007/s11573-014-0724-6

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