In Short Supply: Efficiency Implications of Rational Attention Allocation

65 Pages Posted: 9 May 2016 Last revised: 2 Apr 2020

See all articles by Ankit Kalda

Ankit Kalda

Indiana University - Kelley School of Business - Department of Finance

Xiaoying Li

Indiana University Bloomington - Kelley School of Business

Jan Schneemeier

Indiana University - Kelley School of Business - Department of Finance

Date Written: February 11, 2018

Abstract

This paper shows that investors allocate their scarce attention rationally. Our setting exploits the listing of options on a stock as a source of variation in the relative value of acquiring information on its industry peers. Consistent with the predictions of our theoretical model, we find that options listing is associated with a decline in attention on close industry peers. Lower attention is accompanied by a decline in trading volume and liquidity, and an increase in volatility for peer stocks. These stocks also experience a decline in stock price informativeness leading their managers to infer less information from stock prices and to a decline in firm value and profitability. Overall, our results highlight the real economic costs associated with traders’ limited attention.

Keywords: attention allocation, limited attention, information acquisition, efficiency, options listing

JEL Classification: D82, G12, G14, G31

Suggested Citation

Kalda, Ankit and Li, Xiaoying and Schneemeier, Jan, In Short Supply: Efficiency Implications of Rational Attention Allocation (February 11, 2018). Available at SSRN: https://ssrn.com/abstract=2776803 or http://dx.doi.org/10.2139/ssrn.2776803

Ankit Kalda (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Xiaoying Li

Indiana University Bloomington - Kelley School of Business ( email )

1309 E 10th Street, Hodge Hall 4100
Bloomington, IN 47405
United States
4432047406 (Phone)

Jan Schneemeier

Indiana University - Kelley School of Business - Department of Finance ( email )

1275 E 10th St
Bloomington, IN 47405
United States

HOME PAGE: http://www.jan-schneemeier.com

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