Attention for the Inattentive: Positive Effects of Negative Financial Shocks

61 Pages Posted: 9 Apr 2016 Last revised: 17 Nov 2017

See all articles by Paige Ouimet

Paige Ouimet

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Geoffrey A. Tate

University of Maryland - Robert H. Smith School of Business; National Bureau of Economic Research (NBER)

Date Written: October 2017

Abstract

Using unique data on employee ownership plans sponsored by U.S. public companies, we find that large negative market shocks lead to active changes in portfolio choices among inexperienced and previously inattentive investors. We use employee ownership plans to identify a set of inexperienced investors who did not actively select to participate in the market and who are confronted with a difficult financial decision. These investors appear inattentive at the beginning of the sample. However, following the 2008 Financial Crisis, they are more likely to exercise options, sell restricted stock and participate in an ESPP. We argue these changes are most likely welfare increasing, since the passive default option (nonparticipation) in the ESPP leaves money on the table. Our results suggest a new wrinkle in our understanding of how investors’ personal return experiences interact with risk preferences. Negative shocks mitigate investor inattention on the extensive margin. Thus, at least along certain dimensions, these shocks can induce investors to make decisions that are closer to the optimum.

Keywords: Attention, Financial Crisis, Employee Ownership, ESPP

JEL Classification: D12, D14, D81, G11, J33

Suggested Citation

Ouimet, Paige and Tate, Geoffrey A., Attention for the Inattentive: Positive Effects of Negative Financial Shocks (October 2017). Available at SSRN: https://ssrn.com/abstract=2760422 or http://dx.doi.org/10.2139/ssrn.2760422

Paige Ouimet (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

Geoffrey A. Tate

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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