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Asymmetric Attention and Stock ReturnsJordi MondriaUniversity of Toronto - Department of Economics Thomas WuUniversity of California, Santa Cruz - Department of Economics January 28, 2011 AFA 2012 Chicago Meetings Paper Abstract: We study the asset pricing implications of attention allocation theories. These theories allow us to predict the arrival of private information by observing investors' behavior. Specifically, attention allocation theories suggest that the arrival of private news to local investors lead to an increase in asymmetric attention to stocks between local and nonlocal investors. We construct a measure of asymmetric attention based on aggregate search volume in Google. We find that firms receiving an increase in asymmetric attention earn higher returns, even after controlling for size, book-to-market, momentum and liquidity factors. We find this effect to be stronger among illiquid stocks and stocks headquartered in remote locations. Our results provide direct support for attention allocation theories.
Number of Pages in PDF File: 31 Keywords: Attention Allocation, Asymmetric Information, Stock Returns, Geography JEL Classification: G12, G14, D82 working papers seriesDate posted: March 1, 2011 ; Last revised: June 5, 2011Suggested CitationContact Information
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