Public Attention, Adverse Selection, and the Pricing of Stocks

40 Pages Posted: 5 Oct 2009 Last revised: 5 Feb 2010

See all articles by Matthias Bank

Matthias Bank

University of Innsbruck

Georg Peter

University of Innsbruck

Date Written: February 3, 2010

Abstract

We hypothesize that the degree of public attention influences the price level of stocks in a systematic way. We employ a simple discounted cash flow model with adverse selection and fixed transaction costs that determine an endogenous bid-ask-spread. In the model, rational and risk neutral investors incorporate future trading conditions into their price setting behavior. These trading conditions are driven by the degree of public attention and entail an attention-dependent impact of the bid-ask-spread on required gross returns. Specifically, given a high level of public attention a higher bid-ask-spread may negatively affect required asset returns. We argue that the model implications are consistent with empirical findings, i.e. size, book-to-market, and the momentum effect.

Keywords: adverse selection, public attention, liquidity, bid-ask-spread, asset pricing

JEL Classification: G12

Suggested Citation

Bank, Matthias and Peter, Georg, Public Attention, Adverse Selection, and the Pricing of Stocks (February 3, 2010). Available at SSRN: https://ssrn.com/abstract=1481314 or http://dx.doi.org/10.2139/ssrn.1481314

Matthias Bank (Contact Author)

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

Georg Peter

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

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