Limited Attention Bias and Institutional Investor Characteristics

Abstract

We test for limited attention bias in institutional investor trading. We use the universe of transaction-level data of institutional investors trading in the U.S. corporate bond market. Results show that trading volume abnormally increases in subsamples of uninformative rating actions. We also find abnormal bond returns associated with uninformative rating actions. We then zero in on transaction-level data of the largest domestic institutional investor, an approach that allows us to match investor characteristics to individual transactions. We document an association between restatements and abnormal trading on uninformative news. These results provide supportive evidence that limited attention bias affects institutional investors.

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

JEL Classification: G12, G23, G24, G41