Limited Attention to Detail in Financial Markets

54 Pages Posted: 9 Jun 2016 Last revised: 1 Mar 2019

See all articles by Henrik Cronqvist

Henrik Cronqvist

University of Miami - Department of Finance

Tomislav Ladika

University of Amsterdam

Zacharias Sautner

Frankfurt School of Finance & Management gemeinnützige GmbH; European Corporate Governance Institute (ECGI)

Date Written: December 23, 2018

Abstract

We show that financial analysts and market investors reduced valuations following a large drop in accounting earnings that did not reveal new information about firm fundamentals. FAS 123-R required firms to begin expensing option compensation in income statements, instead of disclosing costs only in footnotes. We exploit that FAS 123-R’s compliance dates were staggered quasi-randomly based on firms’ fiscal year-ends. Firms that expensed options experienced a significant reduction in earnings growth, but their underlying profitability was unchanged. These firms were more likely to miss analysts’ earnings forecasts, relative to firms that did not yet expense options. Analysts also more often revised down their recommendations, resulting in significant stock price underperformance. Our results are consistent with the limited attention hypothesis: Analysts and investors overvalue firms when value-relevant information is less accessible.

Keywords: Limited attention, option expensing, analyst recommendations, earnings forecasts, FAS 123-R

JEL Classification: G41, G24, G18

Suggested Citation

Cronqvist, Henrik and Ladika, Tomislav and Sautner, Zacharias, Limited Attention to Detail in Financial Markets (December 23, 2018). University of Miami Business School Research Paper No. 2790960. Available at SSRN: https://ssrn.com/abstract=2790960 or http://dx.doi.org/10.2139/ssrn.2790960

Henrik Cronqvist

University of Miami - Department of Finance ( email )

5250 University Drive
314-E Jenkins Building
Coral Gables, FL 33146
United States
(305) 284-9482 (Phone)

HOME PAGE: http://sites.google.com/site/henrikcronqvist/

Tomislav Ladika (Contact Author)

University of Amsterdam ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands
020-5255501 (Phone)

HOME PAGE: http://www1.fee.uva.nl/pp/tladika/

Zacharias Sautner

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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