Download This PaperAttention and Underreaction-Related Anomalies
Management Science, Forthcoming.
85 Pages Posted: 26 May 2020 Last revised: 22 Jun 2022
Date Written: August 5, 2021
Abstract
Recent studies have proposed a large set of powerful anomaly-based factors in the stock market.
This study examines the role of investor inattention in the corresponding anomalies underlying these factors and other underreaction-related anomalies. Using media coverage as a proxy for investor attention, we show that the anomalies underlying many recently proposed prominent factors are much more pronounced among firms with low media coverage in portfolio formation periods. In addition, we find many other prominent anomalies that previous literature has attributed to underreaction also tend to perform much better among firms with low media coverage. The average Fama-French five-factor alpha spread of these anomalies is about 0.97% per month among firms with low news coverage and only 0.24% per month among firms with high news coverage. Moreover, most of the alpha spread comes from the short leg of the anomalies and from the firms that are more difficult to arbitrage. Overall, our evidence indicates that investor inattention at least partially drives many of the recently proposed factors.
Keywords: Factors, Underreaction, Inattention, Mispricing, Risk
JEL Classification: G12
Suggested Citation: Suggested Citation