Hirshleifer's research areas include the modeling of social influence, theoretical and empirical asset pricing, and corporate finance. He is the originator of the theory of information cascades, and has modeled investor psychology and its effects on security market under- and over-reactions. His scholarly work on cascades has also received attention from popular economics, with references in both mainstream business and economics media.[6][7] He is a contributor to the fields of behavioral economics and behavioral finance.
Much of his work on investor psychology has focused on the effects of biased self-attribution, overconfidence, and limited attention. He and his co-authors were awarded the 1999 Smith Breeden Award for research showing how investor overconfidence, in combination with biased self-attribution, can explain the short-run momentum (finance) and long-run reversal patterns found the returns of many stock markets.[8] More recent work has shown how investor overconfidence may also help explain the forward premium puzzle in foreign exchange markets
.[9] In his work on limited attention, he has shown that both distracting events[10] and lack of attention to relevant information[11] can help explain important accounting anomalies such as post earnings announcement drift
Hirshleifer's research has taken several approaches to show that stock returns are not exclusively based on relevant financial information, but also incorporate factors such as investors' mood and superstitions. His paper "Good Day Sunshine: Stock Returns and the Weather," found abnormally high returns in the New York Stock Exchange composite on days that it was abnormally sunny in the New York city area.[12][13] His research on the Chinese initial public offering market has provided evidence that Chinese companies which contain listing code numbers considered lucky in Chinese culture are initially priced much higher than financially similar Chinese firms debuting with unlucky numbers in their listing codes.[14]
In addition to investor psychology, Hirshleifer also examines behavior of different parties in financial market. His work with Usman Ali developed a method to identify insider tradings for a firm, which can be used to predict this firm's opportunistic behavior such as earnings management, restatements, SEC enforcement actions, shareholder litigation, and executive compensation.[15] This paper is later reported by Justin Lahart on Wall Street Journal.[16] His research, "Psychological Bias as a Driver of Financial Regulations", argued that regulator psychology plays an important role in financial markets.[17] This research has garnered attention as the 2007 financial crisis has led to greater a scrutiny about the process of setting financial regulation.[18]
Hirshleifer, Jack; Glazer, Amihai; Hirshleifer, David (2005). Price theory and applications: Decisions, markets, and information (7 ed.). Cambridge University Press. ISBN9780521523424.
Bikhchandani, Sushil; Hirshleifer, David; Welch, Ivo (1992). "A Theory of Fads, Fashion, Custom, and Cultural Change as Informational cascades". Journal of Political Economy. 100 (5): 992–1026. CiteSeerX10.1.1.295.578. doi:10.1086/261849. S2CID7784814.
Daniel, Kent; Hirshleifer, David; Subrahmanyam, Avanidhar (1998). "Investor Psychology and Security Market Under- and Overreactions". Journal of Finance. 53 (6): 1839–1885. doi:10.1111/0022-1082.00077. hdl:2027.42/73431. S2CID32589687.
Hirshleifer, David; Shumway, Tyler (2003). "Good day sunshine: Stock returns and the weather". Journal of Finance. 58 (3): 1009–1032. doi:10.1111/1540-6261.00556.
^Daniel, K.; Hirshleifer, D.; Subrahmanyam, A. (1998). "Investor Psychology and Security Market Under- and Overreactions". Journal of Finance. 53 (6): 1839–1885. doi:10.1111/0022-1082.00077. hdl:2027.42/73431. S2CID32589687.
^“Investor Overconfidence and the Forward Premium Puzzle,” Craig Burnside, Bing Han, David Hirshleifer and Tracy Yue Wang, forthcoming, Review of Economic Studies
^“Driven to Distraction: Extraneous Events and Underreaction to Earnings News,” David Hirshleifer, Sonya Lim, and Siew Hong Teoh, Journal of Finance, 63(5), October (2009):2287-2323 Hirshleifer, D.; Lim, S. S.; Teoh, S. H. (2009). "Driven to Distraction: Extraneous Events and Underreaction to Earnings News". The Journal of Finance. 64 (5): 2289. CiteSeerX10.1.1.712.8563. doi:10.1111/j.1540-6261.2009.01501.x.
^“Limited Attention, Information Disclosure, and Financial Reporting, David Hirshleifer and Siew Hong Teoh, Journal of Accounting and Economics, 36(1–3), December, (2003), 337–386.Hirshleifer, D.; Teoh, S. H. (2003). "Limited attention, information disclosure, and financial reporting". Journal of Accounting and Economics. 36 (1–3): 337–386. CiteSeerX10.1.1.459.8737. doi:10.1016/j.jacceco.2003.10.002.
^"Good Day Sunshine: Stock Returns and the Weather," David Hirshleifer and Tyler Shumway, Journal of Finance, 58(3), June, (2003):1009–1032. www.jstor.org/stable/3094570
^This work is also referenced in the Forbes Magazine article "Blinded by the Light: Sunshine and stocks," by Brett Nelson, July 21, 2003
^“Psychological Bias as a Driver of Financial Regulation,” European Financial Management, November 2008, 14(5) pp. 856–874. Hirshleifer, David (2008). "Psychological Bias as a Driver of Financial Regulation". European Financial Management. 14 (5): 856–874. CiteSeerX10.1.1.589.7318. doi:10.1111/j.1468-036X.2007.00437.x. S2CID11145290.