The Impact of Credit Risk Opacity in Retail Investor Behaviour: Attention and Sustained Attention

Abstract

Retail investors' attention to firms plays a crucial role in financial markets. According to the rational inattention hypothesis, investors have limitations in processing all available information and must filter and select which information to attend to. This paper provides new insights into market behaviours and the mechanisms driving investor attention by examining the impact of firms’ information opacity on the attention they receive from retail investors. We proxy opacity by the discrepancies across credit rating agencies on the ratings assigned to firms’ debt and explore its effects on the attention level and the degree of sustained attention computed from the daily Google Search Volume Index. Results document that retail investors are less interested in more opaque firms, which experience greater fluctuations in the attention they receive. Moreover, opacity shocks exacerbate the instability of attention. Our evidence highlights the importance of transparency for firms in attracting retail investors.

Keywords: Investor attention, sustained attention, opacity, credit ratings, rating disagreement