Losing Sight of the Trees for the Forest? Attention Allocation and Anomalies

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URL:	https://ub-madoc.bib.uni-mannheim.de/34215
URN:	urn:nbn:de:bsz:180-madoc-342159
Document Type:	Working paper
Year of publication:	2013
Place of publication:	Mannheim
Publication language:	English
Institution:	Business School > ABWL u. Finanzwirtschaft, insbes. Bankbetriebslehre (Weber 1993-2017)
Subject:	330 Economics
Classification:	JEL: G12 , G14,
Keywords (English):	Limited attention , investor distraction , attention shifts , pairs trading , relative-value arbitrage
Abstract:	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.