Investor Inattention and the Market Impact of Summary Statistics

Investors with limited attention have an incentive to focus on summary statistics rather than individual pieces of information. We use this observation to form a test of the impact of limited attention on the aggregate stock market. We examine the market response to a macroeconomic release that is purely a summary statistic, the U.S. Leading Economic Index (LEI). Consistent with the limited attention hypothesis, we show that the LEI announcement has an impact on aggregate stock returns, return volatility, and trading volume. Furthermore, we find evidence that the response to the LEI is higher for stocks which inattentive investors are more likely to trade.

Investor Inattention, Firm Reaction, and Friday Earnings Announcements

Do firms release news strategically in response to investor inattention? We consider news about earnings and analyze the response of returns to announcements on Friday and other weekdays. Friday announcements have less immediate and more delayed stock return response. The delayed response as a percentage of the total response is 60 percent on Friday and 40 percent on other weekdays. In addition, abnormal trading volume around announcement day is 10 percent lower for Friday announcements. These findings suggest that weekends distract investor attention temporarily. They support explanations of post-earning announcement drift based on underreaction to information caused by limited attention. We also document that firms release worse announcements on Friday. Friday announcements are associated with a 45 percent higher probability of a negative earnings surprise and a 50 basis points lower abnormal return. The firm-based evidence of strategic news release corroborates the investor-based evidence of inattention on Friday. The results for stock returns, volume, and strategic behavior support the hypothesis of limited attention.

Attention, Demographics, and the Stock Market

Do investors pay enough attention to long-term fundamentals? We consider the case of demographic information. Cohort size fluctuations produce forecastable demand changes for age-sensitive sectors, such as toys, bicycles, beer, life insurance, and nursing homes. These demand changes are predictable once a specific cohort is born. We use lagged consumption and demographic data to forecast future consumption demand growth induced by changes in age structure. We find that demand forecasts predict profitability by industry. Moreover, forecasted demand changes 5 to 10 years in the future predict annual industry returns. One additional percentage point of annualized demand growth due to demographics predicts a 5 to 10 percentage point increase in annual abnormal industry stock returns. However, forecasted demand changes over shorter horizons do not predict stock returns. The predictability results are more substantial for industries with higher barriers to entry and with more pronounced age patterns in consumption. A trading strategy exploiting demographic information earns an annualized risk-adjusted return of 5 to 7 percent. We present a model of underreaction to information about the distant future that is consistent with the findings.

The effect of institutional investors’ distraction on firms’ corporate social responsibility engagement: evidence from China

To investigate the impact of institutional investors on firms’ corporate social responsibility (CSR) engagement while controlling for possible endogeneity concerns, we study how Chinese listed firms adjust their CSR decisions when their institutional investors are distracted by exogenous attention-grabbing events and thus are inattentive. With a sample of Chinese listed firms from 2009 to 2017, we find a significant and robust negative relationship between institutional investor inattention and firms’ CSR engagement. This negative relationship is more pronounced for firms with more principal–agent problems and/or weaker corporate governances and is more attributable to the inattention of institutional investors with more monitoring incentives. These findings suggest that managers are less motivated to engage in CSR when they are less monitored by institutional investors, indicating that CSR is beneficial to shareholders of Chinese listed firms. Our findings also indicate that the positive impact of institutional investors on CSR may be constrained by their limited attention

The Five-Day Workweek System and Investor Inattention on Friday Earnings Announcements: Evidence from Korea\u27s Stock Market

Do investors always allocate their attention properly? If not, what potentially drives investors inattention? This paper shows that work schedule can have an influence on the level of attention investors pay. Using the introduction of the five-day workweek system in financial sector of Korea in 2002 as a natural experiment, the paper suggests work schedule can be a key factor driving investor inattention to Friday earnings announcements. Our stock return analyses show stronger immediate response and weaker delayed response to Friday news under the six-day workweek system. The trend was, however, reversed under the five-day workweek system, showing more sluggish immediate response and stronger delayed response to Friday earnings announcements. These findings state that the trade-off between weekend distraction and additional working hours during weekend determines investors attention to Friday earnings announcements.http://www.grips.ac.jp/list/jp/facultyinfo/wie-dainn

Psychology and Economics: Evidence from the Field

The research in Psychology and Economics (a.k.a. Behavioral Economics) suggests that individuals deviate from the standard model in three respects: (i) non-standard preferences; (ii) non-standard beliefs; and (iii) non-standard decision-making. In this paper, I survey the empirical evidence from the field on these three classes of deviations. The evidence covers a number of applications, from consumption to finance, from crime to voting, from giving to labor supply. In the class of non-standard preferences, I discuss time preferences (self-control problems), risk preferences (reference dependence), and social preferences. On non-standard beliefs, I present evidence on overconfidence, on the law of small numbers, and on projection bias. Regarding non-standard decision-making, I cover limited attention, menu effects, persuasion and social pressure, and emotions. I also present evidence on how rational actors -- firms, employers, CEOs, investors, and politicians -- respond to the non-standard behavior described in the survey. I then summarize five common empirical methodologies used in Psychology and Economics. Finally, I briefly discuss under what conditions experience and market interactions limit the impact of the non-standard features.

Net Income Measurement, Investor Inattention, and Firm Decisions

This paper studies the interaction between investor inattention and firms' capital allocation decisions by exploiting an accounting rule change that requires publicly traded firms to incorporate changes in unrealized gains and losses (UGL) from equity securities into net income. We build a model with risk-averse investors who can be attentive or inattentive and managers who choose how much to invest in financial assets. The model makes two main predictions. First, with inattentive investors, the rule change will cause firms' stock prices to react more strongly to changes in UGL. Second, we identify conditions under which the rule can lead to a higher stock price discount because of higher perceived residual uncertainty, and managers respond by cutting investment in financial assets. We use US insurance company data to test these predictions. We find that insurers' stock returns react more strongly to changes in UGL on equity securities after the rule change, and more so for firms with low analyst coverage. Using a difference-in-differences approach, we find that by 2020, public insurance companies cut investments in publicly traded stocks by almost 20%. Our results highlight the impact that investor inattention has on firms' stock prices and resource allocation decisions

Investor attention and FX market volatility

We study the relationship between investors’ active attention, measured by a Google search volume index (SVI), and the dynamics of currency prices. Investor attention is correlated with the trading activities of large FX market participants. Investor attention comoves with contemporaneous FX market volatility and predicts subsequent FX market volatility, after controlling for macroeconomic fundamentals. In addition, investor attention is related to the currency risk premium. Our results suggest that investor attention is a priced source of risk in FX markets

Information Salience, Investor Sentiment, and Stock Returns: The Case of British Soccer Betting

Soccer clubs listed on the London Stock Exchange provide a unique way of testing stock price reactions to different types of news. For each firm, two pieces of information are released on a weekly basis: experts’ expectations about game outcomes through the betting odds, and the game outcomes themselves. The stock market reacts strongly to news about game results, generating significant abnormal returns and trading volumes. We find evidence that the abnormal returns for the winning teams do not reflect rational expectations but are high due to overreactions induced by investor sentiment. This is not the case for losing teams. There is no market reaction to the release of new betting information although these betting odds are excellent predictors of the game outcomes. The discrepancy between the strong market reaction to game results and the lack of reaction to betting odds may not only be the result from overreaction to game results but also from the lack of informational content or information salience of the betting information. Therefore, we also examine whether betting information can be used to predict short-run stock returns subsequent to the games. We reach mixed results: we conclude that investors ignore some non-salient public information such as betting odds, and betting information predicts a stock price overreaction to game results which is influenced by investors’ mood (especially when the teams are strongly expected to win).information salience;investor sentiment;investor attention;sports betting;soccer;football;economics of sports;market efficiency