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Effective Application of Goal-setting Theory

Topic: Effective Application of Goal-setting Theory

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lease summarize the topic in the first couple(2-3) of paragraphs. The paper has to have some relevance to marketing and or business management. A conclusion paragraph is needed. (atleast 5 sentences long)

Introduction

Due to globalization and increased competition in the business environment, organizations have come up with strategies to enhance their competitive advantage and sustainable wealth creation through effective goal setting strategies. Consequently, researchers have focused on formulating theories and concepts to describe how goal setting affects individual employees and the organizations they work for. As such, there have been conflicting perspectives on goal setting with particular emphasis on performance and achievement of organizational goals and objectives. On the other hand, supervisors and company managers are focused on enhancing employee productivity by developing strategies for employee motivation and aligning company objectives to personal goals. In this regard, goal setting has been an integral part of overall business strategies and human resource management in particular. Experts have also focused on formulating hypothesis and providing empirical evidence on the application of goal setting in the achievement of organizational goals. Much work has also been done in describing the role of goal setting as a strategy for enhancing performance through employee motivation. The critics of the goal setting strategy have made their suggestions based on contradicting perspectives like the expectations and social cognitive theories which have been applied successfully in social psychology to describe human behavior. This paper critically examines the theory of goal setting and employee motivation. In addition, the paper reviews theories and concepts that provide conflicting perspectives on goal setting and employee motivation strategies.

Organizational Goal setting

At the organizational level, goal setting refers to the establishment of corporate goals and objectives and matching these goals to employee capability and personal goals. However, the concept of goal setting elicits conflicting perspectives from researchers and managers. While some managers recognize the need for balancing organizational needs to employee development, others are more focused in achieving organizational objectives in total disregard for employee welfare. Despite these conflicting managerial practices on goal setting, there is an apparent consensus that effective goal setting must focus on specificity, time, achievability, and quantification. More importantly, goal setting has a profound application not only in achieving organizational values and missions but also in personal development. Experts agree that goal setting strategies must strike a balance between organizational objectives and employee capacity and development. This balance must emphasize on the individual needs and behavior of the employees as a major resource in organizational development and sustainable creation of wealth.

The theory of goal setting

There have been conflicting perspectives on the theory of goal setting as one of the most effective strategies for enhancing organizational performance and profitability while developing the employee. The proponents of the goal setting theory argue that employees are able to identify with organizational values, mission and objectives at personal level. Similarly, employees are able to work towards a clearly defined goal which enhances commitment, involvement and responsibility. On the other hand, goal setting strategies provides an appropriate framework for the implementation of motivational programs (Vancouver, 2000). Organizations use goal setting strategies to implement effective reward programs that reflect employee capability and personality. On the other hand, the critics of goal setting argue that this strategy undermines implicit learning by focusing on goals and objectives at the expense of personal growth. However, there appears to be a convergence of perspectives that goal setting gives employees a sense of purpose and responsibility that enhances overall performance. The relationship between goal setting and performance has been explained as a complex mechanism. This mechanism activates cognitive skills and abilities that enhance employee performance. In addition, the mechanism reinforces persistence and energizes the employees as they attempt to achieve challenging tasks. Moreover, goal setting saves energy and time as the individual employees are aware of what is required of them. The proponents of goals setting argue that this strategy must incorporate some basic characteristics and principles.

Locke’s theory; Organizational Goal setting and employee motivation strategy

Goal setting has been identified as one of the most effective tools for motivating employees. Some researchers have come up with theories for explaining the relationship between setting goals and motivating employees. The Locks theory of goal setting has received increased attention in recent years for professional and personal performance. According to Locke, there is a direct relationship between employee’s performance and the specificity of a task. In addition, Locke revealed that employees perform better when they know their expectations and job requirements (Deci and Ryan 2002). In a complementary research by Lathan, it was established that employees’ performance is substantially improved by the setting of goals. Other studies have reinforced the existing literature on this linkage by examining the principles of goal setting and their association to employee motivation

Principles of goal setting in relation to employee motivation

To effectively set goals in an organization, it is vital to ensure that such goals have some characteristics. These characteristics include specificity, challenge, commitment and feedback among others.

Specificity

There is a certain level of convergence that effective goal setting must focus on clear and measurable goals. The objective of goal setting should be to create clarity, enhance communicate, sense of responsibilities and realization of expectations. In this regard, organizations must be able to come up with appropriate motivational programs based on the clarity of targets and objectives. The supervisor is able to make clear decisions on which employee behavior to reward and which behaviors to discourage.

Challenge

Challenge is a vital element in goal setting. There is increasing evidence that challenges motivate employees. The need to achieve pushes people to enhance their performance. Moreover, human beings have a natural motivation to produce good work. This motivation can be enhanced by making the task more challenging and increasing the compensation. In this regard, there are arguments that managers need to consistently review goals and objectives to ensure that they are challenging. However, such goals must remain realistic to avoid demoralizing the employee incase the results are not achieved.

Relevance

An effective goal setting strategy focuses on the relevance of the strategy. This saves time and resources as organizations direct their resources an energy towards a particular course. On the other hand, employees are able to identify their expectation and work hard to achieve targets.

Participation and commitment

There seams to be a considerable level of consensus that an effective goal setting strategy must incorporate the involvement and participation of all stakeholders to enhance commitment and efficacy. This brings in the concept of participatory management which focuses on enhancing commitment in tasks by encouraging participation. Employees who participate in policy and decision making processes are more loyal and productive. It is therefore imperative that organizations must focus on involving their employees on decision making processes to enhance commitment and performance (Judge and Bono 2001).

Feedback

The processes of giving and receiving feedback in organizations have been one of the most challenging issues in employee management. This comes against the backdrop of increasing evidence that reveal that effective communications must comprise of effective feedback mechanisms. An effect of communication feedback is essential not only in team building but also in enhancing communication between the employees and the organization. As such, the role of feedback cannot be underestimated in promoting team building and organizational management (VandeWalle and Slocum 2001).

Feedback enables the employees to evaluate their performance. When employees find that they are below their targets, they increase their efforts and seek for other ways to improve performance. In this regard, feedback is an effective modulator of employee performance.

Challenges and limitations of the goal setting theory

However, although goal setting is a plausible theory that has proved to be highly effective in enhancing employee performance and organizational profitability, there are several limitations to this end. One of the challenges of goal setting theory pertains to the conflicts between employee interest and organizational objectives. There are arguments that at times team building processes may aggravate conflicts between employee and organizations (Martocchio, 1994). This is usually counterproductive and results into poor performance. On the other hand, there are arguments that goal setting does not necessarily lead to job satisfaction. Critics of the goal setting theory suggest that an effective goal setting strategy must encompass job satisfaction tactics to enhance employee loyalty. In addition, it is notable that goal setting may be counterproductive if employees lack essential skills and technical competencies. Such employees resist attempts by organizations to set up goals even in circumstances where the employees are involved in decision making processes.

The relationship between goal setting and performance

Extensive research has shown that goal setting affects performance in a greater way. The mechanism of this action has been described often with conflicting views. One of the mechanisms that have been propagated to explain the association between performance and goal setting focuses on the behavioral and cognitive characteristics of the employee (Kashdan, 2004). In this regard, goal setting enables the organization to direct energy on core and relevant activities hence saving costs and time.

The second mechanism for explaining the relationship between goal setting and employee performance is based on the energy they confer to employees. This includes an enhanced physical involvement, commitment and subjective effort.

The third mechanism used to explain the relation between goal setting and performance is based on the fact that goal setting enhances persistence of the employee. This has been established by examining the intensity of performance and speed of accomplishing tasks. This is especially important when employees are assigned challenging tasks. On the other hand, goals have an indirect effect on actions by inducing discovery and application of task- relevant skills and experiences.

The concept of personal goals as external motivational factor

Locke came up with another set of factors that affect employee performance. He came up with the personal goals that constituted what he referred to as the motivational hub. Evidently, individual’s motivation is boosted by self-sufficiency and commitment for the achievement of goals. Employee commitment and self-sufficiency form the external variables that affect employee performance. The personal goals concept focuses on how personal goals affect performance in respect to assignments. In this regard, the interaction of personal goals and self efficacy on one hand and task efficacy and performance on the other hand, provides an effective analysis of goal setting. Although monetary gains are some of the incentives that have been recommended in enhancing personal motivation, several studies have shown that this strategy does not work for all individuals. Some studies have gone further to explain that monetary incentives may not necessarily mediate motivation (Graham and Golan 1991). On the other hand, there are arguments that employee participation in decision making is mainly cognitive and thus soliciting for employee participation must focus on personal behavior and not commitment. However, there is general consensus that participation has the primary effect of enhancing performance and commitment.

Goals and job satisfaction

Goals form a good criterion for measuring employee satisfaction. This is explained by studies which have shown that employees who exceed their targets are more satisfied than those who fail to reach their targets.

Implications of the expectancy and social cognitive theories

While goal setting is one of the fundamental theories used to explain employee motivation, the principles conflict with the valence, instrumentality and expectancy concepts which hold that anticipated satisfaction also referred to as valence and instrumentality which refers to the link between performance and reward, as well as the link between effort and performance enhances performance. Under the perceived behavioral control concepts, repeated expectations influence employee behavioral responses. Some of the expectations studied include expectations, motivation, performance and employee frustrations (Cameron and Pierce 1994).

The expectations are categorized into those pertaining self efficacy and those entailing to outcome expectancy. According to this concept, an employee who faces repeated failures develops negative attitudes, looses confidence and develops strong perceptions against the set goals. Consequently, employees’ performance drops significantly (Armitage and Conner 2001).

Conclusion

Given the contribution of a motivated workforce in the current business environment, Goal setting remains one of the most effective strategies for employee motivation. Although experts disagree on several approaches for goal setting by citing the Maslows theory and the expectations and social cognitive theory, it is evident that an effective goal setting strategy enhances employee motivation and achievement of organizational mission, values and objectives. Certainly, goal setting strategies are usually complex and challenging in practice. However, in setting goals, organizations must strike a balance between the objectives and employee interest. On the other hand, it is imperative that goal setting strategies must focus on relevance, challenge, commitment, involvement and specificity as some of the key determinants of effective goals.

References

Armitage, C. & Conner, M. 2001. Efficacy of the theory of planned behavior: a meta-analytic review. British Journal of Social Psychology, 40, 470–489.

Cameron, J. & Pierce, D. 1994. Reinforcement, reward, and intrinsic motivation. A meta-analysis. Review of Educational Research 64: 340-465.

Deci, E. & Ryan, M. 2002. Handbook of self-determination research. Rochester, NY, University of Rochester Press.

Graham, S. & Golan, S. 1991. Motivational influences on cognition: task involvement, ego involvement and depth of information processing. Journal of Educational Psychology 83: 187-194.

Judge, T. & Bono, E. 2000). Relationship of core self-evaluations traits – self-esteem, generalized self-efficacy, locus of control, and emotional stability – with job satisfaction and job performance: A meta-analysis, Journal of Applied Psychology, Vol. 86 pp.80 – 92. Retrieved April 29, 2010 from HYPERLINK “http://www.ufstudies.net/…/Judge%20and%20Bono%20CSE%20meta%20JAP%20published.pd” www.ufstudies.net/…/Judge%20and%20Bono%20CSE%20meta%20JAP%20published.pd..

Kashdan, T. 2004. Curiosity. Character Strengths and Virtues. C. Peterson and M. Seligman. Washington and New York, American Psychological Association and Oxford University Press: 125-141. Retrieved April 29, 2010 from HYPERLINK “http://www.beswick.info/psychres/management.html” http://www.beswick.info/psychres/management.html.

Martocchio, J. 1994. Effects of conceptions of ability on anxiety, self-efficacy, and learning in training, Journal of Applied Psychology, Vol. 79 pp.819 – 825.Vancouver, B. 2000. Self-regulation in organizational settings: A tale of two paradigms, in M. Boekaerts, P.R. Pintrich (Eds),Academic Press, San Diego, CA, US, pp.303 – 341.VandeWalle, W. & Slocum, C. 2001. The role of goal orientation following performance feedback, Journal of Applied Psychology, Vol. 86 pp.630 – 640.Bibliography

Armstrong, M. 2006. A Handbook of Human Resource Management Practice. London: Kogan Page. HYPERLINK “http://en.wikipedia.org/wiki/International_Standard_Book_Number” o “International Standard Book Number” http://en.wikipedia.org/wiki/International_Standard_Book_Number

Legge, K. 2004. Human Resource Management: Rhetorics and Realities. Basingstoke: Palgrave Macmillan.

Mulcaster, W. 2009. Three Strategic Frameworks, Business Strategy Series, Vol 10, No1, pp 68 – 75. Retrieved April 29, 2010 from HYPERLINK “http://www.finance.reachinformation.com/strategic_management.aspx” www.finance.reachinformation.com/strategic_management.aspx

Effect of weather on security market returns

Table of Contents

TOC o “1-3” h z u HYPERLINK l “_Toc374125926″CHAPTER 2: LITERATURE REVIEW PAGEREF _Toc374125926 h 1

HYPERLINK l “_Toc374125927″2.1.Empirical review PAGEREF _Toc374125927 h 1

HYPERLINK l “_Toc374125928″2.2.Impact of cloudy cover on security market returns PAGEREF _Toc374125928 h 1

HYPERLINK l “_Toc374125929″2.2.1.Impact of sunshine on security market returns PAGEREF _Toc374125929 h 2

HYPERLINK l “_Toc374125930″2.3.Impact of temperature on security market returns PAGEREF _Toc374125930 h 4

HYPERLINK l “_Toc374125931″2.4.Differences in market sensitivity to weather PAGEREF _Toc374125931 h 6

HYPERLINK l “_Toc374125932″2.6. Conclusion PAGEREF _Toc374125932 h 6

HYPERLINK l “_Toc374125933″References PAGEREF _Toc374125933 h 7

HYPERLINK l “_Toc374125934″Appendices PAGEREF _Toc374125934 h 9

HYPERLINK l “_Toc374125935″Appendix 1: Comparative analysis on the impact of weather on market returns PAGEREF _Toc374125935 h 9

HYPERLINK l “_Toc374125936″Appendix 2: Temperature effects o market returns PAGEREF _Toc374125936 h 9

CHAPTER 2: LITERATURE REVIEWEmpirical ReviewStock markets returns have been the subject of many studies for centuries. The first seminal work on this subject can be found in Saunders his work on impact of cloud cover on market returns in 1993 (Keef & Roush, 2007b). Cao & Wei (2005) argue that in investment finance, market returns are sensitive to diverse factors within the market and outside the market. Among the diverse factors that have been investigated in these studies is the influence on weather on stock market returns. There are diverse ways that this aspect can be perceived from a researcher’s point of view. According to Cao & Wei (2005), of the aspects is evidence that there is a correlation between stock market returns and the weather conditions prevailing in a given period. However, Chang et al (2006) observe that existing empirical literature do not have a unanimous consensus on the exact impact of weather conditions on market returns. While some advocate the reasoning that in deed there is a relationship between these two variables, some object to it.

Impact of cloudy cover on security market returnsAnother seminal work supporting the arguments of Yuan, Zheng & Zhu (2006) can be traced to earlier 1990s when Saunders (Dowling & Lucey, 2005) conducted a study to determine the impact of cloud cover on market returns. Dowling & Lucey (2005) also alludes to the seminal works of Trompley which studied the same problem. More recently, cloud cover effect on market returns was performed by Keef & Roush (2007b). Their findings indicated that returns were very low during days characterized by 100% cloudy cover than days with a 0% to 20% cloudy cover. However, the differences in returns were not significant. This had also been observed by Tompley in 1997 and Saunders in 1993 as Dowling & Lucey (2005) indicate. Although not imparting a significant effect on returns, the general deductions of Dowling & Lucey (2005) and Keef & Roush (2007b) indicate that generally there is a negative correlation between cloudy cover and market returns.

Loughran & Schultz (2004) present a quantitative analysis of the impact of clouds on the stock returns in New York and find that the stocks with the highest returns (0.073%) are those studied under overcast relative to a 0.063% average return for clear skies all day. For days with scattered clouds, Loughran & Schultz (2004) found that the New York stock return was averagely 0.046% and 0.054% in cloudy days. Consequently, the percentage of clouds in the sky exhibited some effect on the changes of returns in New York. Moderate clouds (scattered was found to have significant effect on the stock returns. In regard to the economic effect of cloud cover on stock market returns, Loughram & Schultz (2004) argue that investors can enhance their margin of their returns by monitoring the trend in cloud cover. For instance, a day with a overcast will be a very busy day in trading and there will be a significant increase in stock market turnover and returns. However, the economic effect is not significant as the statistical significance because in economics, there are diverse other factors that come to play.

Impact of sunshine on security market returnsThe studies of Dowling & Lucey (2005) and Keef & Roush (2007b) are supported by Akhtari (2010) who take a different approach in evaluating cloudy cover on security market returns. He analyzes the impact of sunshine on stock markets returns using Wall Street as a case study. Akhtari (2010) uses the regression analysis model to find the relationship between cloudy cover (availability of sunshine) and the Dow Jones Industrial Average market index from 1948 to 2010 on an annual frequency.

The findings confirmed the results that were observed in the seminal works of Dowling & Lucey (2005), Keef & Roush (2007b) and Keef & Roush (2007a). There was a negative relationship between cloud cover and the gross Dow Jones Index representing market return. Logically, it can be observed that sunshine will have a positive effect on market returns. In other words, when there is full sunshine, the day is not cloudy and hence returns are high (extrapolating the findings of Dowling & Lucey (2005), Keef & Roush (2007b), Keef & Roush (2007a) and Yuan, Zheng & Zhu (2006)). In regard to modeling the impact of sunshine or cloudiness on security markets, Hirshleifer & Shumway (2003) augment the regression model used in Akhtari (2010).

Using a pooled regression approach, Hirshleifer & Shumway (2003) constrain the intercept and slope to be similar in all areas to be studied for cloudy cover or strength of sunshine. This difference in statistical modeling approach results in an outcome which indicates that there is a very significant correlation between clouds and markets returns. Clearly, there is a divergence in findings between Dowling & Lucey (2005) discussed earlier and those of Hirshleifer & Shumway (2003). However, the methodological approach by Hirshleifer & Shumway (2003) has been criticized on one area: it assumes that errors are independent which Chang et al (2006) & Keef & Roush (2007b) argue is not plausible. The regression model is given as:

EMBED Equation.3 ……Equation I

Where EMBED Equation.3 is the gross return which is measured by the Dow Jones market index in the Akhtari (2010) and Goetzmann & Zhu (2005) on day t. EMBED Equation.3 is the dummy variable representing the month, EMBED Equation.3 is the dummy variable for the specific day in a week, EMBED Equation.3 is the variable for cloudy cover and EMBED Equation.3 is the error term. However, in order to control price movement aspects, Keef & Roush (2003) and Keef & Roush (2005) recommend on having the lagged variable of returns represented by EMBED Equation.3 . Although the nature of the statistical model may change depending on number of variables and subjectivity of the researcher, this study shall utilize the general understanding that regression is a good model in determining the relation between weather and market returns.

In regard to New York, one of the earliest studies to determine the impact of weather conditions on NYSE stock indices was Saunders in late 1990s. To confirm the results of Saunders, Hirshleifer & Shumway (2001) conducted a similar study. The chi-square test statistic of logit regression was very significant at P value of 0.0033. They split the time series data into sub- periods (1982-1989) and 1990-1997. Hirshleifer & Shumway (2001) found that in the first set, the logit coefficient was -0.0136, a chi-square value of 0.68 and P- value of 0.4081. In the second set, the logit coefficient was -0.0578 a chi-square value of 11.38 and P-value of 0.0007. These findings indicate that in New York, the effect of sunshine on stock returns was more significant in 1990s than in 1980s. Not much has been mentioned in regard to the economic significance of the impact of sunshine on market returns. Nevertheless, the economic significance of sun shine on market returns is great. This is because trading will be higher on a sunny day and hence returns will be higher as exemplified by the positive statistical significance explained above. Therefore, there is no difference between statistical and economic significance.

Impact of temperature on security market returnsTemperature is another indicator of weather that has been investigated by diverse researchers to decipher its impact on security market returns. One of the best literatures in this area is that of Cao& Wei (2005). Similar studies have been undertaken by Keef & Roush (2003), Loughran & Schultz (2004), Kamstra, Kramer & Levi (2003) and Pardo & Valor (2003). Temperature has been used as one of the variables in many of the studies and the findings indicate that there is a negative relationship between security market returns and the degree of temperature in the course of the day.

To some extent, there is some relationship between cloudy cover, sunshine and temperature. In other words, days with full cloudy cover are assumed to be colder than those with full sunshine which are presumed to have high temperatures. However, there is some confusion in results when the above empirical studies are assessed critically. In other words, if high temperatures result in low returns (negative relationship) and high temperature is associated with sunny days which, according to Akhtari (2010) have positive relationship, then clearly there is confusion or lack of consensus. Nonetheless, these two results will be expected during the study and contrary finding will not be unusual.

According to Zadorozhna (2009), temperature has diverse effects on returns depending on the market and even economic situation. He argues that in his study to find the impact of weather elements on stock returns, there are many significant positive and negative relationships. However, temperature and evaporation was observed to have an insignificant relationship between temperature and stock returns at 5% confidence level. While there is no literature that could be found which explicitly and succinctly illustrates the impact of temperature on stock returns especially in New York, Worthington (2006) presents one of the best illustrations. Focusing on the decomposition of returns in the last row, first column, the average return in winter which is the coldest season is positive (-0.0262). However, in summer when temperatures are expected to be highest, the average returns are positive (0.0621). The return in the hottest season is higher than the cold season as postulated by the findings of Worthington (2006). However, a general correlation between these two variables (temperature and stock returns) is negative. Worthington (2006) indicates that periods/seasons of prolonged temperature increase will have a significant and adverse effect on returns of certain market portfolios. For example, agriculture based companies’ returns may be adversely affected. If an index like the NYSE Composite consists of significantly high number of firms in sectors easily affected by temperature, the general effect will be observed in the whole market returns.

Differences in market sensitivity to weatherAlthough it has been observed in the antecedent discussion there is clearly a relationship, whether positive or negative, between weather indicators and market returns, there is some confusion. Especially in the subsection on temperature, it was observed that arguments of Akhtari (2010) if extrapolated did not fit those of Cao& Wei (2005). On one hand, there was a report on positive correlation between temperature and returns while on the other there was evidence indicating otherwise. Zadorozhna (2009) clears this confusion and indicates that this is because of difference is sensitivity of stock markets to the elements of weather. He summarizes his studies in appendix 1 below after conducting a comparative assessment of many different markets. The markets were: Romania (BET), Russia (RTS), Ukraine (PFTS), Latvia (RIGSE), Romania (BET), Bulgaria (SOFIX) Croatia (CROBEX) and Ukraine (PFTS).

The results by Zadorozhna (2009) above indicate that there are diverse responses of stock market returns to different elements. For example, temperature up, which represents high temperature recorded, exhibit a positive relationship in some markets and negative in others.

2.6. Conclusion

In summary, diverse elements of weather that have been assessed in the antecedent discussion such as cloudiness, sunshine and temperature culminate in one conclusion: evidence of a relationship between weather and market returns. Nonetheless, the lack of consensus on one deduction in each weather sub- element is due to diversity in sensitivity of different markets. For instance, one empirical study indicates that there is negative relationship between temperature and returns while another argues that sunshine is positively correlated with returns. However, the diversity in market sensitivity has saved these literatures from a possible critique.

ReferencesAkhtari, (2010). Reassessment of the Weather Effect: Stock Prices and Wall Street Weather. The Michigan Journal of Business. 1: 51-70

Cao, M., & Wei, J. (2005). Stock market returns: A note on temperature anomaly, Journal of Banking and Finance 29: 1559–1573.

Chang, T., et al. (2006). Are stock market returns related to weather effects? Empirical evidence from Taiwan, Physica A 364: 343–354.

Dowling, M., & Lucey, B. (2005). Weather, biorhythms, beliefs and stock returns – Some preliminary Irish evidence, International Review of Financial Analysis 14: 337–355.

Goetzmann, W. & Zhu, N. (2005), Rain or shine: Where is the weather effect? European Financial Management 11: 559–578.

Keef, S. &. Roush, M. (2003). The weather and stock returns in New Zealand, Quarterly Journal of Business and Economics 41: 61–79.

Keef, S. &. Roush, M. (2005). Influence of weather on New Zealand financial securities, Accounting and Finance 45: 415–437.

Keef, S. &. Roush, M. (2007a). Daily weather effects on the returns of Australian stock indices, Applied Financial Economics 17: 173–184.

Keef, S. &. Roush, M. (2007b). A meta-analysis of the international evidence of cloud cover on stock returns, Review of Accounting and Finance 6: 324–338.

Hirshleifer, D., & Shumway, T. (2003). Good day sunshine: Stock returns and the weather, Journal of Finance 58: 1009–1032.

Kamstra, M., Kramer, M. & Levi, M. (2000). Losing sleep at the market: The daylight-savings anomaly. American Economic Review 90: 1005–1011.

Kamstra, M., Kramer, L. & Levi, M (2002). Losing sleep at the market: The daylight saving anomaly: Reply, American Economic Review 92: 1257–1263.

Kamstra, M., Kramer, M. & Levi, M. (2003). Winter blues: A sad stock market cycle, American Economic Review 93: 324–343.

Loughran, T. & Schultz, P. (2004). Weather, Stock Returns, and the Impact of Localized Trading Behavior. Journal of Financial and Quantitative Analysis, 39(2), 343-364

Lucey, B., & Dowling, M. (2005). The role of feelings in investor decision-making, Journal of Economic Surveys 19: 211–237.

Pardo, A., & Valor, E. (2003). Spanish stock returns: Rational or weather-influenced? European Financial Management 9: 117–126.

Yuan, K., Zheng, L. & Zhu, Q. (2006). Are investors moonstruck? Lunar phases and stock returns. Journal of Empirical Finance, 13(1): 1-23

-781050403225AppendicesAppendix 1: Temperature effects o market returnsTable 1: Temperature and stock return performance (source: Worthington, 2006)

EFFECT OF WEATHER ON MARKET RETURNS

Security Market Returns

Name

Institution

Date

Question One

Stock markets returns have been the subject of many studies for centuries. The first seminal work on this subject can be found in Saunders his work on impact of cloud cover on market returns in 1993 (Keef & Roush, 2007b). Cao & Wei (2005) argue that in investment finance, market returns are sensitive to diverse factors within the market and outside the market. Among the diverse factors that have been investigated in these studies is the influence on weather on stock market returns. There are diverse ways that this aspect can be perceived from a researcher’s point of view. According to Cao & Wei (2005), of the aspects is evidence that there is a correlation between stock market returns and the weather conditions prevailing in a given period. However, Chang et al (2006) observe that existing empirical literature do not have a unanimous consensus on the exact impact of weather conditions on market returns. While some advocate the reasoning that in deed there is a relationship between these two variables, some object to it.

Question Two

Another seminal work supporting the arguments of Yuan, Zheng & Zhu (2006) can be traced to earlier 1990s when Saunders (Dowling & Lucey, 2005) conducted a study to determine the impact of cloud cover on market returns. Dowling & Lucey (2005) also alludes to the seminal works of Trompley which studied the same problem. More recently, cloud cover effect on market returns was performed by Keef & Roush (2007b). Their findings indicated that returns were very low during days characterized by 100% cloudy cover than days with a 0% to 20% cloudy cover. However, the differences in returns were not significant. This had also been observed by Tompley in 1997 and Saunders in 1993 as Dowling & Lucey (2005) indicate. Although not imparting a significant effect on returns, the general deductions of Dowling & Lucey (2005) and Keef & Roush (2007b) indicate that generally there is a negative correlation between cloudy cover and market returns.

Question Three

The studies of Dowling & Lucey (2005) and Keef & Roush (2007b) are supported by Akhtari (2010) who take a different approach in evaluating cloudy cover on security market returns. He analyzes the impact of sunshine on stock markets returns using Wall Street as a case study. Akhtari (2010) uses the regression analysis model to find the relationship between cloudy cover (availability of sunshine) and the Dow Jones Industrial Average market index from 1948 to 2010 on an annual frequency.

The findings confirmed the results that were observed in the seminal works of Dowling & Lucey (2005), Keef & Roush (2007b) and Keef & Roush (2007a). There was a negative relationship between cloud cover and the gross Dow Jones Index representing market return. Logically, it can be observed that sunshine will have a positive effect on market returns. In other words, when there is full sunshine, the day is not cloudy and hence returns are high (extrapolating the findings of Dowling & Lucey (2005), Keef & Roush (2007b), Keef & Roush (2007a) and Yuan, Zheng & Zhu (2006). In regard to modeling the impact of sunshine or cloudiness on security markets, Hirshleifer & Shumway (2003) augment the regression model used in Akhtari (2010).

Question Four Temperature is another indicator of weather that has been investigated by diverse researchers to decipher its impact on security market returns. One of the best literatures in this area is that of Cao& Wei (2005). Similar studies have been undertaken by Keef & Roush (2003), Loughran & Schultz (2004), Kamstra, Kramer & Levi (2003) and Pardo & Valor (2003). Temperature has been used as one of the variables in many of the studies and the findings indicate that there is a negative relationship between security market returns and the degree of temperature in the course of the day.