In Short Supply: Efficiency Implications of Rational Attention Allocation

66 Pages Posted: 9 May 2016 Last revised: 2 May 2023

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

Michigan State University - Eli Broad College of Business

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 on peer firms’ stocks is associated with declines in attention and price informativeness, and an increase in return volatility. These changes are accompanied by declines in investment-price sensitivity and profitability, indicating a deterioration of market feedback.

Keywords: attention allocation, information acquisition, analyst coverage, efficiency, investment-q sensitivity, 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). Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, 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 6100
Bloomington, IN 47405
United States
8122727734 (Phone)

Jan Schneemeier

Michigan State University - Eli Broad College of Business ( email )

632 Bogue St
East Lansing, MI 48824
United States

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