Does Investor Attention Affect Stock Prices?

Abstract

We study the effect of investor attention on stock returns over short horizons (less than a month). For each trading day, we construct portfolios of stocks from companies in the two smallest size quintiles that are likely to attract unusual attention from retail investors. These attention portfolios consist of stocks whose ticker symbols are similar to stocks of large companies in the news (proxied by extreme returns or high trade volumes) on the formation day. Subsequent to the formation, trade activity in attention stocks increases relative to the rest of the stocks in the same size quintile (baseline portfolio). Attention portfolios yield 0.95% -- 3.3% annualized excess return (relative to their corresponding baseline portfolios) in the three weeks following their formation. Our results survive controls for industry effects and are not driven by trading errors of investors confused over ticker symbols.