Stale News, Limited Attention Bias and Institutional Investors

Abstract

We test for limited attention bias in institutional investor trading, when news is stale. Using the universe of transaction-level data in the U.S. corporate bond market around stale downgrades, we find an abnormal increase in trading volume, abnormal bond returns and a subsequent reversal. We do not find a reversal for abnormal bond returns associated with informative rating actions. We then focus on the largest, domestic, institutional investors, thus matching investor characteristics to individual transactions. We document an association between restatements and abnormal trading on stale news. These results provide supportive evidence that limited attention bias affects institutional investors.

Keywords: Behavioral Finance, Limited Attention, Stale News, Institutional Investors, News Analytics.

JEL Classification: G12, G23, G24, G41