Investor Inattention and the Underreaction to Stock Recommendations

Financial Management, Forthcoming

Charles A. Dice Center Working Paper No. 2008-2

Fisher College of Business Working Paper No. 2008-03-002

40 Pages Posted: 5 Mar 2008 Last revised: 25 Sep 2010

See all articles by Roger Loh

Roger Loh

Nanyang Technological University - Nanyang Business School

Date Written: May 5, 2010

Abstract

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

Loh, Roger, Investor Inattention and the Underreaction to Stock Recommendations (May 5, 2010). Financial Management, Forthcoming, Charles A. Dice Center Working Paper No. 2008-2, Fisher College of Business Working Paper No. 2008-03-002, Available at SSRN: https://ssrn.com/abstract=1089773

Roger Loh (Contact Author)

Nanyang Technological University - Nanyang Business School

91 Nanyang Ave
Singapore, 639956
Singapore

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