Attention: How High-Frequency Trading Improves Price Efficiency Following Earnings Announcements

58 Pages Posted: 25 Jul 2015 Last revised: 21 Sep 2021

See all articles by Bidisha Chakrabarty

Bidisha Chakrabarty

Saint Louis University - Richard A. Chaifetz School of Business

Pamela C. Moulton

Cornell University - SC Johnson College of Business

Xu (Frank) Wang

Saint Louis University - Chaifetz School of Business

Date Written: September 20, 2021

Abstract

Recent research indicates that high-frequency trading (HFT) helps incorporate fundamental information into prices, but how this happens is unclear. We examine reduced attention constraints as an important channel through which HFT enhances price efficiency. Using multiple proxies of attention constraints, we find that price inefficiencies are reduced by 65% to 100% when high-frequency traders (HFTs) trade following low-attention earnings announcements: Initial price responses are larger and post-earnings-announcement drift is reduced. Results are not driven by firm size or announcement time-of-day. Our findings highlight how limited attention, a human bias affecting asset prices, is mitigated when machines trade.

Keywords: High-frequency trading, limited attention, price efficiency, earnings announcements

JEL Classification: G02, G10, G14, M40, M41

Suggested Citation

Chakrabarty, Bidisha and Moulton, Pamela C. and Wang, Xu (Frank), Attention: How High-Frequency Trading Improves Price Efficiency Following Earnings Announcements (September 20, 2021). Journal of Financial Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2634621 or http://dx.doi.org/10.2139/ssrn.2634621

Bidisha Chakrabarty

Saint Louis University - Richard A. Chaifetz School of Business ( email )

3674 Lindell Blvd
St. Louis, MO MO 63108-3397
United States
3149773607 (Phone)
3149771479 (Fax)

HOME PAGE: http://business.slu.edu/departments/finance/faculty-staff/bidisha-chakrabarty

Pamela C. Moulton (Contact Author)

Cornell University - SC Johnson College of Business ( email )

Ithaca, NY 14853
United States

Xu (Frank) Wang

Saint Louis University - Chaifetz School of Business ( email )

3674 Lindell Blvd
St. Louis, MO 63108-3397
United States

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