Economic Uncertainty and Investor Attention

Abstract

This paper develops a multi-firm equilibrium model of information acquisition based on differences in firms’ characteristics. It is shown that higher market-level uncertainty attracts investor attention to firm-level earnings announcements. Increased investor attention magnifies the earnings response coefficients of all announcing firms. However, reactions to increased attention differ by firm characteristics (e.g., firms with higher systematic risk attract more investor attention and their prices react more to earnings announcements). In the model, heightened investor attention caused by high uncertainty implies a steeper CAPM relation. The implications of the model for the cross section of firms are tested using firm-level attention measures and stock returns around earnings announcements and using CAPM portfolio tests on high- versus low-uncertainty days

Keywords: Investor attention; Economic uncertainty; Earnings announcements; CAPM

JEL Classification: G14; G41; M41