Investor Attention and the Use of Leverage
Financial Review (forthcoming)
41 Pages Posted: 30 Jun 2021 Last revised: 17 Jan 2023
Date Written: May 31, 2021
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: Suggested Citation