Investor Inattention and the Underreaction to Stock Recommendations
Financial Management, Forthcoming
Charles A. Dice Center Working Paper No. 2008-2
40 Pages Posted: 5 Mar 2008 Last revised: 14 Nov 2013
Date Written: May 5, 2010
Investors’ reaction to stock recommendations is often incomplete so that there is a predictable post-recommendation drift. I investigate investor inattention as a plausible explanation for this drift by using prior turnover as a proxy for attention. I find that low attention stocks react less to stock recommendations than high attention stocks around the three-day event window. Subsequently, the recommendation drift of firms with low attention is more than double in magnitude when compared to firms with high attention. Similar conclusions are reached with alternative proxies for attention. The evidence supports investor inattention as a source of the stock recommendation drift.
Keywords: Underreaction, Investor Attention, Security Analysts, Stock Recommendations
JEL Classification: G12, G14, G29, G32
Suggested Citation: Suggested Citation
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