Limited Investor Attention and Stock Market Misreactions to Accounting Information

48 Pages Posted: 18 Nov 2005 Last revised: 7 Jul 2011

See all articles by David A. Hirshleifer

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Sonya S. Lim

DePaul University - Department of Finance

Siew Hong Teoh

University of California, Irvine - Accounting Area

Date Written: November 17, 2010

Abstract

We provide a model in which a single psychological constraint, limited investor attention, explains both under- and over-reaction to different earnings components. Investor neglect of information in current-period earnings about future earnings induces post-earnings announcement drift and the pro fit anomaly. Neglect of earnings components causes accruals and cash flows to predict abnormal returns. We derive new untested empirical implications relating the strength of the drift, accruals, cash flows, and pro fit anomalies to the forecasting power of current earnings-related information for future earnings, the degree of investor attention to different types of information, and the volatilities of and correlation between accruals and cash flows. We also show that owing to costs of attention, in equilibrium some investors may decide not to attend to the implications of earnings or its components.

Keywords: limited attention, behavioral finance, investor psychology, capital markets, accruals, market efficiency

JEL Classification: G12, G14, M41, M43

Suggested Citation

Hirshleifer, David A. and Lim, Sonya S. and Teoh, Siew Hong, Limited Investor Attention and Stock Market Misreactions to Accounting Information (November 17, 2010). Available at SSRN: https://ssrn.com/abstract=846685 or http://dx.doi.org/10.2139/ssrn.846685

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sonya S. Lim

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

HOME PAGE: http://sites.google.com/site/sonyalim/

Siew Hong Teoh (Contact Author)

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1,284
Abstract Views
4,887
rank
14,802
PlumX Metrics