Question

What are some of the ways that investors react to financial or national news, and how does that impact companies' and organizations's equity and debt financing options and values? How much of investor behavior is rationally motivated?

Answer 1

Investors reacts hysterically when there is either good or bad news about the ecomony and the companies. There are lot of examples that we witnessed across the globe.

For example,take the Brexit issue, where stock markets world wide plunged with a huge sell off and bond markets too impacted due to the uncertainity. Companies equity and debt cost will surge if there is uncertainity in the economy where investors expects more premium for the unceratinity risk in the economy.

Another example is the present situation of Coronavirus where the world markets has slumped from last month due to unceratinity and economic impact on account of lockdown. In all these cases, usually the cost of debt and equity will rise to compensate for the investors risk taking.

In many occasions, analysts witnessed the market bull or bear lead by more of a herd behaviour of the investors. There is a seperate domain to explain the behaviour of investors called as behaviour finance. It is clearly evident that in all the situations, investors are not rational.