Attention Induced Trading and Returns: Evidence from Robinhood Users
60 Pages Posted: 23 Oct 2020 Last revised: 11 Feb 2021
Date Written: February 2, 2021
We study the influence of financial innovation by fintech brokerages on individual investors’ trading and stock prices. Using data from Robinhood, we find that Robinhood investors engage in more attention-induced trading than other retail investors, and Robinhood outages disproportionately reduce trading in high-attention stocks. The evidence is consistent with Robinhood attracting relatively inexperienced investors. However, we show that it can also be partially driven by the app’s unique features. Consistent with models of attention-induced trading, intense buying by Robinhood users forecast negative returns. Average 20-day abnormal returns are -4.7% (-19.6%) for the top stocks purchased each day (extreme herding events).
Keywords: Attention-Induced Trading, Herding, FinTech, Limited Attention, System 1 vs. System 2, Price Pressure, Return Predictability
JEL Classification: G11, G12, G14, G40, G41
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