This paper tests asset pricing implications of the investor attention shift hypothesis proposed in recent theoretical work. We create a novel proxy for the dynamics of inattention towards firm-specific information and explore its impact on prominent return anomalies. As hypothesized and with all else equal, the proxy positively predicts the post-earnings-announcement drift and negatively predicts the success of momentum strategies. Moreover, it has explanatory power for the profitability of pairs trading, a promising yet widely neglected setting concerned with the relative pricing efficiency of economically linked stocks. Taken together, our findings highlight the importance of time-varying investor attention allocation.
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