Does Investor Attention Affect Stock Prices?

37 Pages Posted: 27 Jan 2011 Last revised: 16 Mar 2011

Xiaodi Li

Georgia State University - Department of Finance

Reza S. Mahani

Georgia State University - Department of Finance

Vallapuzha Sandhya

Financial Engines; Georgia State University - J. Mack Robinson College of Business

Date Written: March 14, 2011

Abstract

We study the effect of investor attention on stock returns over short horizons (less than a month). For each trading day, we construct portfolios of stocks from companies in the two smallest size quintiles that are likely to attract unusual attention from retail investors. These attention portfolios consist of stocks whose ticker symbols are similar to stocks of large companies in the news (proxied by extreme returns or high trade volumes) on the formation day. Subsequent to the formation, trade activity in attention stocks increases relative to the rest of the stocks in the same size quintile (baseline portfolio). Attention portfolios yield 0.95% -- 3.3% annualized excess return (relative to their corresponding baseline portfolios) in the three weeks following their formation. Our results survive controls for industry effects and are not driven by trading errors of investors confused over ticker symbols.

Keywords: investor attention, stock returns, trade activity, industry effects

JEL Classification: G12

Suggested Citation

Li, Xiaodi and Mahani, Reza S. and Sandhya, Vallapuzha, Does Investor Attention Affect Stock Prices? (March 14, 2011). Available at SSRN: https://ssrn.com/abstract=1748851 or http://dx.doi.org/10.2139/ssrn.1748851

Xiaodi Li

Georgia State University - Department of Finance ( email )

University Plaza
Atlanta, GA 30303-3083
United States

Reza S. Mahani (Contact Author)

Georgia State University - Department of Finance ( email )

1237 RCB building
35 Broad street
Atlanta, GA 30303
United States
(404) 413-7347 (Phone)
(404) 413-7312 (Fax)

HOME PAGE: http://www2.gsu.edu/mahani

Vallapuzha Sandhya

Financial Engines ( email )

1804 Embarcadero Road
Palo Alto, CA 94303
United States

Georgia State University - J. Mack Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States

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