Investor Attention and the Use of Leverage

Financial Review (forthcoming)

41 Pages Posted: 30 Jun 2021 Last revised: 17 Jan 2023

See all articles by Denis Davydov

Denis Davydov

Hanken School of Economics

Jarkko Peltomäki

Stockholm University - Stockholm Business School

Date Written: May 31, 2021

Abstract

We investigate the effects of using different sources of investment leverage, i.e., securities with embedded leverage and traditional margin accounts, on the portfolio performance of retail investors, recognizing that these effects may be conditional on investor attention. We find that investors who trade on margin underperform those who do not have margin accounts; we also find that investors trading securities with embedded leverage show even poorer performance than investors trading on margin. The negative effect of leverage usage, however, decreases with greater investor attention, measured by portfolio monitoring frequency. Results suggest that more attentive investors gain more from using investment leverage.

Keywords: investor attention, investment leverage, margin trading, embedded leverage, portfolio performance

JEL Classification: G11, G29, G40

Suggested Citation

Davydov, Denis and Peltomäki, Jarkko, Investor Attention and the Use of Leverage (May 31, 2021). Financial Review (forthcoming), Available at SSRN: https://ssrn.com/abstract=3869603 or http://dx.doi.org/10.2139/ssrn.3869603

Denis Davydov

Hanken School of Economics ( email )

PB 287
Helsinki, Vaasa 65101
Finland

Jarkko Peltomäki (Contact Author)

Stockholm University - Stockholm Business School ( email )

Stockholm
Sweden

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