Attention Allocation and Return Co-Movement: Evidence from Repeated Natural Experiments
75 Pages Posted: 20 Nov 2016 Last revised: 4 Nov 2017
Date Written: October 31, 2017
We hypothesize that when investors’ attention to financial markets decreases, they rationally allocate relatively more attention to market-level information than to firm-specific information, leading to increases in stock return co-movements. Using large jackpot lotteries as exogenous shocks that attract investors’ attention away from the stock market, we find supportive evidence that stock returns co-move more with the market on large jackpot days. This effect is stronger for stocks preferred by retail investors and is not driven by gambling sentiment. We also find that stock returns are less sensitive to earnings surprises and co-move more with industries on large jackpot days.
Keywords: limited attention, attention allocation, return co-movement, earnings surprises
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation