Attention Spillover in Asset Pricing

Abstract

Exploiting a screen display feature whereby the order of stock display is determined by the stock’s listing code, we lever a novel identification strategy and study how the interaction between investor overconfidence and limited attention affect asset pricing. We find that stocks with neighbors on the display that experience higher returns in the past two weeks are associated with higher returns in the future week, which are reverted in the long run. This finding is consistent with our conjectures that investors (a) tend to trade more after positive investment experience, and (b) are more likely to pay attention to neighboring stocks. Both conjectures are confirmed using trading data. We further sharpen the identification using a quasi-natural experiment in which the screen display for affected stocks is exogenously changed.

Keywords: limited attention, overconfidence, attention spillover, price impact, return predictability

JEL Classification: G11, G12, G41