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Investor attention and market correction

Zhongdong Chen (Department of Finance, College of Business Administration, University of Northern Iowa, Cedar Falls, Iowa, USA)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 23 July 2020

Issue publication date: 15 October 2021

232

Abstract

Purpose

This study disentangles the investor-base effect and the information effect of investor attention. The former leads to a larger investor base and higher stock returns, while the latter facilitates the dissemination of information among investors and impacts informational trading.

Design/methodology/approach

Using positive volume shocks as a proxy for increased investor attention, this study evaluates the impacts of the investor-base effect and the information effect of investor attention on market correction following extreme daily returns in the US stock market from 1966 to 2018.

Findings

This study finds that the investor-base effect increases subsequent returns of both daily winner and daily loser stocks. The information effect leads to economically less significant return reversals for both the daily winner and daily loser stocks. These two effects tend to have economically more significant impacts on the daily loser stocks. The economic significance of these two effects is also related to firm size and the state of the stock market.

Originality/value

This study is the first to disentangle the investor-base effect and the information effect of increased investor attention. The evidence that the information effect facilitates the dissemination of new information and impacts stock returns contributes to the strand of studies on the impact of investor attention on market efficiency. This evidence also contributes to the strand of studies analyzing the impact of informational trading on stock returns. In addition, this study provides evidence for market overreaction and the subsequent correction. The results for up and down markets contribute to the literature on the investors' trading behavior.

Keywords

Acknowledgements

The author very grateful to Robert Hudson (the editor) and the anonymous referee for many insightful and constructive comments that have greatly improved the paper. All remaining errors are my own.

Citation

Chen, Z. (2021), "Investor attention and market correction", Review of Behavioral Finance, Vol. 13 No. 4, pp. 386-409. https://doi.org/10.1108/RBF-02-2020-0042

Publisher

:

Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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