Does Investor Attention Affect Stock Trading and Returns? Evidence from Publicly Listed Firms in China

Abstract

Limited attention is an inevitable outcome of voluminous information. Investors facing a large number of stocks can only focus on a few and endeavor to have access to in-depth knowledge. Since the retrieved knowledge would affect investors’ decisions, investor attention becomes a factor in affecting stock returns and trading volumes. Through using 890,840 firm-week observations of Chinese listed firms between 2011 and 2018 as a sample, we document that investor attention, measured by abnormal Baidu search volume index (ASVI), is positively associated with contemporaneous stock returns but with a complete reversal in the subsequent period; and ASVI exhibits a positive link with trading volumes without a subsequent reversal, but its predictable ability becomes weaker in subsequent weeks. The effect of ASVI is pronounced for the ChiNext market and firms with higher level of financial transparency. We further find investor attention has been driven by five corporate events including earnings announcements, management forecasts, financial analysts following, mergers and acquisitions and dividend payout. This paper contributes to the theory of limited attention through using a direct measure of attention, providing evidence on its economic consequences in the Chinese stock market and exploring specific events that drive investor attention.

Keywords:

• Investor attention
• Retail investor
• Trading volume
• Stock return
• China

Notes

1 Prior research (e.g. Kahneman 1973) has documented that a wealth of information creates a poverty of attention because efficient information might be buried in a large amount of other information and accordingly fails to be captured.

2 According to our observation (see Table 2 in this paper), retail investors account for nearly 80% of the population in the Chinese stock market.

3 Internet celebrity effect implies that when a listed firm is linked with internet celebrities, it receives striking attention from the celebrities’ fans which usually brings a rapid increase of stock prices, such as New Culture Corporation experienced four-time limit up in January 2020 after it cooperated with an internet celebrity.

4 The data is from: https://tongji.baidu.com/research.

5 We do not refuse that investor attention and stock market performance might be interacted. Some prior studies adopt extreme abnormal trading volume (Barber and Odean 2008) and stock prices (Seasholes and Wu 2007) as the proxies of attention. And some prior studies document evidence of the interaction between attention and stock returns (Vlastakis and Markellos 2012; Vozlyublennaia 2014). However, we agree with Da, Engelberg, and Gao’s (2011) notion that the attention hypothesis acts as a more uniform interpretation on evidence.

6 When a Chinese listed firm is labelled “specially treated,” it suggests that the firm has reported losses for two successive years, and a “ST” labeling aims to warn investors of possible financial risk. If losses reoccur for a third year, such firm may lose its listing status.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [Grant numbers: 71602085; 71602010; 71672082].