Inattention as a Limit to Arbitrage: Evidence from School Holidays
40 Pages Posted: 19 Nov 2014 Last revised: 22 Sep 2016
Date Written: August 31, 2016
We document that institutional trading and short selling around earnings announcements are 15%-20% lower during school holidays than other times. This reduced trading cannot be explained by liquidity or short sale constraints. Prices react to negative news released during school holidays with a significant delay. A zero-investment strategy that invests in the after-holiday drift earns abnormal returns of over 70 basis points per month, and this anomaly is stronger among large, liquid stocks with high institutional holdings. Collectively, our evidence suggests that even professional investors are susceptible to inattention which can act as a limit to arbitrage and has pricing implications.
Keywords: anomaly; seasonality; investor inattention; volume; short selling; stock returns
JEL Classification: G12, G14, G15
Suggested Citation: Suggested Citation