Asymmetric Attention and Stock Returns
University of Toronto - Department of Economics
University of California, Santa Cruz - Department of Economics
January 28, 2011
AFA 2012 Chicago Meetings Paper
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
Date posted: March 1, 2011 ; Last revised: June 5, 2011
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