Paying Attention: Overnight Returns and the Hidden Cost of Buying at the Open

Abstract

Using 13 years of intraday data for U.S. stocks, we find a strong tendency for positive returns during the overnight period followed by reversals during the trading day. This behavior is driven by an opening price that is high relative to intraday prices. We find this temporary price inflation at the open is concentrated among stocks that have recently attracted the attention of retail investors, and these high attention stocks have high levels of net retail buying at the start of the trading day. In addition, we document that the sensitivity of opening prices to retail investor attention is more pronounced for stocks that are difficult to value and costly to arbitrage, and is greater during periods of high overall retail investor sentiment. The additional implicit transaction costs for retail traders who buy high attention stocks near the open frequently exceed the effective half spread.

Keywords: market efficiency, attention, sentiment, retail investors, transaction costs, short sale

JEL Classification: D82, G14, G19