CORAL GABLES, Fla., July 7, 2017 /PRNewswire-USNewswire/ -- When investors see the color red used to present a firm's financial data, they expect less from the firm's future stock returns than they do when the same data are presented in black, says a new study from the University of Miami School of Business Administration. So much so, that when a firm's past stock decline is shown in red versus black, investors predicted a further decline in the stock leading them to invest close to 24 percent less in the company's stock. This effect is broadly consistent with what color psychologists characterize as "red-danger associations" that are often used in U.S. culture to convey extreme caution such as with stop signs and the terms 'red flags' and 'red ink' and therefore, this triggers "avoidance behavior." For the first time, this study shows the impact that color has on investors' financial decision-making.
Further, the researchers found the effect of the color red is different amongst cultures. For example, they studied the impact of using red versus black when conveying information among investors in China, where red is usually associated with luck and good fortune. They found no significant difference in investor behavior whether the information was displayed in red or black in China.
The researchers selected hundreds of U.S. participants and hundreds of Chinese participants to look at separate 12-month periods of S&P 500 companies where negative stock periods were detailed. The company names were not used in order to prevent any preconceived biases. Some participants were given reports where the period of stock decline was displayed in red and others were given reports using black color. They then were asked questions that lead to information regarding whether or not they'd consider buying this stock in the future.
"We were surprised by the level of pessimistic behavior experienced by U.S. investors upon seeing the same stock decline shown in red versus black," said researcher Henrik Cronqvist, professor of finance at the University of Miami School of Business Administration. "Based on this, it would be smart for IR professionals to steer clear of red in their next financial reports, for instance, and instead use only black for negative numbers," he continued. "It is a small change that could make a big impact."
NOTE TO EDITORS: The full study is available at https://papers.ssrn.com/abstract=2974139
About the University of Miami School of Business Administration
The University of Miami School of Business Administration is a leader in preparing individuals and organizations to excel in the complex, dynamic, and interconnected world of global business. With its location in a major center for international business, the School is acclaimed for its global perspective, student and faculty diversity, and engagement with the business community. More information about the University of Miami School of Business Administration can be found at www.bus.miami.edu.
SOURCE University of Miami School of Business Administration