Rationally Neglected Stocks

70 Pages Posted: 7 Jan 2019 Last revised: 19 Nov 2019

See all articles by Oleg Chuprinin

Oleg Chuprinin

UNSW; Financial Research Network (FIRN)

Arseny Gorbenko

Monash University - Department of Banking and Finance

Chang Mo Kang

Hanyang University - School of Business

Date Written: November 15, 2019

Abstract

There are large cross-sectional differences in the probability and magnitude of mispricing among stocks. Mispricing is traditionally attributed to stock-specific frictions. We show that mispricing can be explained in a rational equilibrium where investors allocate investigative resources to stocks to maximize their expected profits from arbitrage. Stocks with smaller dollar profit potential are allocated less attention and their percentage mispricing is higher on average. For such stocks, information discovery by investors is slow and the mispricing is corrected mostly through mandatory disclosures by firms. Using measures of institutional attention and trading discreteness, we confirm this mechanism empirically. The attention allocation channel explains the cross-sectional pattern of mispricing better than any classic arbitrage frictions.

Keywords: Information Discovery, Attention, Institutional Trading

JEL Classification: G11, G14

Suggested Citation

Chuprinin, Oleg and Gorbenko, Arseny and Kang, Chang Mo, Rationally Neglected Stocks (November 15, 2019). Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3285757 or http://dx.doi.org/10.2139/ssrn.3285757

Oleg Chuprinin (Contact Author)

UNSW ( email )

Room 349, UNSW Business School
High St
UNSW Sydney, NSW 2052
Australia
406674419 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Arseny Gorbenko

Monash University - Department of Banking and Finance ( email )

900 Dandenong Road
Caulfield East
Melbourne, Victoria 3145
Australia

Chang Mo Kang

Hanyang University - School of Business ( email )

222, Wangsimni-ro
Seongdong-gu
Seoul
Korea

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