Abstract
Recent studies have used internet search volume as a measure of investor attention. In addition, literature argues that limited investor attention contributes to market underreaction to public information such as earnings announcements. We show that firms with more investor attention captured by abnormal internet search frequency have stronger announcement-day reactions and weaker post-earnings-announcement drift. The effect of abnormal search frequency is stronger for medium and small-sized firms, which usually receive insufficient attention. Our evidence indicates that firms with higher search intensity are traded more, especially by individual investors. Moreover, we imply that it is a sustainable development for investors to be able to use public information through the internet for investment in stock markets.
Highlights
Traditional asset pricing models are typically based on the assumption that information is instantaneously incorporated into prices; insufficient attention to the asset can prevent investors from engaging in this process because attention is a limited cognitive resource [1,2,3,4]
Since the coefficients of earnings surprise are positive in the univariate test, our findings suggest that investor attention affects trading activity more than public information itself does
As we aim to find the impact of search frequency on market reaction to earnings announcements, we investigate the means of the variables for quintiles based on abnormal search volume on the announcement date
Summary
Traditional asset pricing models are typically based on the assumption that information is instantaneously incorporated into prices; insufficient attention to the asset can prevent investors from engaging in this process because attention is a limited cognitive resource [1,2,3,4]. The evidence indicates that higher abnormal search frequency is associated with weaker post-earnings-announcement drift for firms with good earnings surprises, even after controlling for other attention variables, such as abnormal returns and abnormal turnover These results mean that increased attention on firms may drive the reaction, which reflects earnings news more and reduces market underreaction, supporting studies finding that investor inattention contributes to post-earnings-announcement drift. The long–short profits from KOSDAQ stocks are larger than those from KOSPI stocks These findings confirm that investor attention captured by abnormal search frequency can reduce market underreaction and lead to weaker post-earnings-announcement drift, especially for firms that received less attention.
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