An Explanation of Financial Market Anomalies : Risk-Based or Behavioral View? A New Perspective on Financial Constraints

At present, there are two main explanations for market anomalies, namely, risk-based and behavioral. While the risk-based perspective states that abnormal returns arise owing to investors undertaking financial risks, the behavioral perspective states that abnormal returns arise owing to investor psychology. However, we believe that the source of abnormal returns originates from financing constraints. Viewed from a different perspective, financial constraints arise from information asymmetry, which in turn leads to an incorrect assessment of behavior. Moreover, the risk of financial distress also has a correlation with financial constraint. The link between the two provides another common explanation for market anomalies. This study utilizes publicly disclosed stock data of the Taiwan stock exchange in order to prove the above argument. Furthermore, apart from the commonly observed explanations of under- and overreaction, cash dividends can also logically explain the extent of under- and overreaction, which plays a critical role in determining the expected returns of an asset portfolio