In Short Supply: Efficiency Implications of Rational Attention Allocation

71 Pages Posted: 9 May 2016 Last revised: 20 Dec 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 examines the role of rational attention allocation in shaping private information acquisition, and its implications for price informativeness and real outcomes. Our setting exploits the listing of options on a stock as a source of variation in the relative value of acquiring information on its close industry peers. Consistent with the predictions of our theoretical model, we find that options listing is associated with a decline in attention, trading volume, and liquidity, and an increase in volatility for peer stocks. These peer firms further experience a decline in stock price informativeness, 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, G14, G12, 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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