Faculty Publications

Title

Investor attention and market correction

Document Type

Article

Keywords

Extreme daily returns, Informational trading, Investor attention, Volume shocks

Journal/Book/Conference Title

Review of Behavioral Finance

Volume

13

Issue

4

First Page

386

Last Page

409

Abstract

Purpose: This study disentangles the investor-base effect and the information effect of investor attention. The former leads to a larger investor base and higher stock returns, while the latter facilitates the dissemination of information among investors and impacts informational trading. Design/methodology/approach: Using positive volume shocks as a proxy for increased investor attention, this study evaluates the impacts of the investor-base effect and the information effect of investor attention on market correction following extreme daily returns in the US stock market from 1966 to 2018. Findings: This study finds that the investor-base effect increases subsequent returns of both daily winner and daily loser stocks. The information effect leads to economically less significant return reversals for both the daily winner and daily loser stocks. These two effects tend to have economically more significant impacts on the daily loser stocks. The economic significance of these two effects is also related to firm size and the state of the stock market. Originality/value: This study is the first to disentangle the investor-base effect and the information effect of increased investor attention. The evidence that the information effect facilitates the dissemination of new information and impacts stock returns contributes to the strand of studies on the impact of investor attention on market efficiency. This evidence also contributes to the strand of studies analyzing the impact of informational trading on stock returns. In addition, this study provides evidence for market overreaction and the subsequent correction. The results for up and down markets contribute to the literature on the investors' trading behavior.

Department

Department of Finance

Original Publication Date

10-15-2021

DOI of published version

10.1108/RBF-02-2020-0042

Repository

UNI ScholarWorks, Rod Library, University of Northern Iowa

Language

en

Share

COinS