IDEAS home Printed from https://ideas.repec.org/a/bla/finrev/v58y2023i2p287-313.html
   My bibliography  Save this article

Investor attention and the use of leverage

Author

Listed:
  • Denis Davydov
  • Jarkko Peltomäki

Abstract

We investigate the effects of using different sources of investment leverage, that is, securities with embedded leverage and traditional margin accounts, on the portfolio performance of retail investors, recognizing that these effects may be conditional on investor attention. We find that investors who trade on margin underperform those who do not have margin accounts; we also find that investors trading securities with embedded leverage show even poorer performance than investors trading on margin. The negative effect of leverage usage, however, decreases with greater investor attention, measured by portfolio monitoring frequency. Results suggest that more attentive investors gain more from using investment leverage.

Suggested Citation

  • Denis Davydov & Jarkko Peltomäki, 2023. "Investor attention and the use of leverage," The Financial Review, Eastern Finance Association, vol. 58(2), pages 287-313, May.
    • Handle: RePEc:bla:finrev:v:58:y:2023:i:2:p:287-313
    DOI: 10.1111/fire.12337
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/fire.12337
    Download Restriction: no
    File URL: https://libkey.io/10.1111/fire.12337?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Uhr, Charline & Meyer, Steffen & Hackethal, Andreas, 2019. "Smoking hot portfolios? Overtrading from self-control failure," SAFE Working Paper Series 245, Leibniz Institute for Financial Research SAFE, revised 2019.
    2. Davydov, Denis & Florestedt, Otto & Peltomäki, Jarkko & Schön, Marcus, 2017. "Portfolio performance across genders and generations: The role of financial innovation," International Review of Financial Analysis, Elsevier, vol. 50(C), pages 44-51.
    3. Thomas Boulton & Bill B. Francis & Thomas Shohfi & Daqi Xin, 2021. "Investor awareness or information asymmetry? Wikipedia and IPO underpricing," The Financial Review, Eastern Finance Association, vol. 56(3), pages 535-561, August.
    4. Farkas, Miklós & Váradi, Kata, 2021. "Do leveraged warrants prompt individuals to speculate on stock price reversals?," Journal of Empirical Finance, Elsevier, vol. 63(C), pages 164-176.
    5. Michael Bailey & Eduardo Dávila & Theresa Kuchler & Johannes Stroebel, 2019. "House Price Beliefs And Mortgage Leverage Choice," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(6), pages 2403-2452.
    6. Nicolosi, Gina & Peng, Liang & Zhu, Ning, 2009. "Do individual investors learn from their trading experience?," Journal of Financial Markets, Elsevier, vol. 12(2), pages 317-336, May.
    7. Antonio Gargano & Alberto G Rossi, 2018. "Does It Pay to Pay Attention?," The Review of Financial Studies, Society for Financial Studies, vol. 31(12), pages 4595-4649.
    8. Frazzini, Andrea & Pedersen, Lasse Heje, 2014. "Betting against beta," Journal of Financial Economics, Elsevier, vol. 111(1), pages 1-25.
    9. Rawley Z Heimer & Alex Imas, 2022. "Biased by Choice: How Financial Constraints Can Reduce Financial Mistakes," The Review of Financial Studies, Society for Financial Studies, vol. 35(4), pages 1643-1681.
    10. Zhi Da & Joseph Engelberg & Pengjie Gao, 2011. "In Search of Attention," Journal of Finance, American Finance Association, vol. 66(5), pages 1461-1499, October.
    11. Denis Davydov & Ian Khrashchevskyi & Jarkko Peltomäki, 2021. "Investor attention and portfolio performance: what information does it pay to pay attention to?," The European Journal of Finance, Taylor & Francis Journals, vol. 27(17), pages 1740-1764, November.
    12. Scott Cederburg & Michael S. O'Doherty, 2016. "Does It Pay to Bet Against Beta? On the Conditional Performance of the Beta Anomaly," Journal of Finance, American Finance Association, vol. 71(2), pages 737-774, April.
    13. Gina Nicolosi & Liang Peng & Ning Zhu, 2003. "Do Individual Investors Learn from Their Trading Experience?," Yale School of Management Working Papers ysm439, Yale School of Management, revised 01 Sep 2009.
    14. Vlastakis, Nikolaos & Markellos, Raphael N., 2012. "Information demand and stock market volatility," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1808-1821.
    15. Daniel Andrei & Michael Hasler, 2015. "Investor Attention and Stock Market Volatility," The Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 33-72.
    16. Narat Charupat & Peter Miu, 2014. "A New Method to Measure the Performance of Leveraged Exchange-Traded Funds," The Financial Review, Eastern Finance Association, vol. 49(4), pages 735-763, November.
    17. D’Hondt, Catherine & McGowan, Richard & Roger, Patrick, 2021. "Trading leveraged Exchange-Traded products is hazardous to your wealth," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 287-302.
    18. Heimer, Rawley & Simsek, Alp, 2019. "Should retail investors’ leverage be limited?," Journal of Financial Economics, Elsevier, vol. 132(3), pages 1-21.
    19. Dierick, Nicolas & Heyman, Dries & Inghelbrecht, Koen & Stieperaere, Hannes, 2019. "Financial attention and the disposition effect," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 190-217.
    20. Charupat, Narat & Miu, Peter, 2011. "The pricing and performance of leveraged exchange-traded funds," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 966-977, April.
    21. Brad M. Barber & Terrance Odean, 2001. "Boys will be Boys: Gender, Overconfidence, and Common Stock Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 261-292.
    22. George M Korniotis & Alok Kumar, 2011. "Do Older Investors Make Better Investment Decisions?," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 244-265, February.
    23. Joël Peress, 2004. "Wealth, Information Acquisition, and Portfolio Choice," The Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 879-914.
    24. DeVault, Luke & Turtle, H.J. & Wang, Kainan, 2021. "Blessing or curse? Institutional investment in leveraged ETFs," Journal of Banking & Finance, Elsevier, vol. 129(C).
    25. Cremers, Martijn & Pareek, Ankur, 2016. "Patient capital outperformance: The investment skill of high active share managers who trade infrequently," Journal of Financial Economics, Elsevier, vol. 122(2), pages 288-306.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Minxing Sun & Weike Xu, 2024. "Short selling and readability in financial disclosures: A controlled experiment," The Financial Review, Eastern Finance Association, vol. 59(2), pages 265-292, May.
    2. Ryan Flugum & Choonsik Lee & Matthew E. Souther, 2023. "What happens in Vegas stays in Vegas? Firsthand experience and EDGAR search activity in Las Vegas casino hotels," Financial Management, Financial Management Association International, vol. 52(3), pages 409-432, September.
    3. Ni, Xiaoran & Jin, Qi, 2024. "Institutional investors' limited attention and stock price informativeness in emerging markets: Evidence from China11We thank participants in 2021 China International Finance Conference (Shanghai) and," Pacific-Basin Finance Journal, Elsevier, vol. 84(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Arnold, Marc & Pelster, Matthias & Subrahmanyam, Marti G., 2022. "Attention triggers and investors’ risk-taking," Journal of Financial Economics, Elsevier, vol. 143(2), pages 846-875.
    2. Dierick, Nicolas & Heyman, Dries & Inghelbrecht, Koen & Stieperaere, Hannes, 2019. "Financial attention and the disposition effect," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 190-217.
    3. Wang, Albert Y. & Young, Michael, 2023. "Mood, attention, and household trading: Evidence from terrorist attacks," Journal of Financial Markets, Elsevier, vol. 66(C).
    4. Hasso, Tim & Pelster, Matthias & Breitmayer, Bastian, 2020. "Terror attacks and individual investor behavior: Evidence from the 2015–2017 European terror attacks," Journal of Behavioral and Experimental Finance, Elsevier, vol. 28(C).
    5. Grant, Andrew & Kalev, Petko S. & Subrahmanyam, Avanidhar & Joakim Westerholm, P., 2022. "Retail trading activity and major lifecycle events: The case of divorce," Journal of Banking & Finance, Elsevier, vol. 135(C).
    6. Hasler, Michael & Ornthanalai, Chayawat, 2018. "Fluctuating attention and financial contagion," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 106-123.
    7. Gregor Dorfleitner & Lars Hornuf & Martina Weber, 2023. "Paralyzed by shock: the portfolio formation behavior of peer-to-business lending investors," Review of Managerial Science, Springer, vol. 17(3), pages 1037-1073, April.
    8. Al Guindy, Mohamed, 2021. "Cryptocurrency price volatility and investor attention," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 556-570.
    9. Xu, Rong & Liu, Yaodong & Hu, Nan & Guo, Jie (Michael), 2022. "What drives individual investors in the bear market?," The British Accounting Review, Elsevier, vol. 54(6).
    10. Cornaggia, Kimberly & Hund, John & Nguyen, Giang, 2022. "Investor attention and municipal bond returns," Journal of Financial Markets, Elsevier, vol. 60(C).
    11. Kuo, Wei-Yu & Zhao, Jing, 2023. "Pre-holiday limit order cancellation of individual and institutional investors," Finance Research Letters, Elsevier, vol. 52(C).
    12. Hervé, Fabrice & Zouaoui, Mohamed & Belvaux, Bertrand, 2019. "Noise traders and smart money: Evidence from online searches," Economic Modelling, Elsevier, vol. 83(C), pages 141-149.
    13. Hong, Ziyang & Liu, Qingfu & Tse, Yiuman & Wang, Zilu, 2023. "Black mouth, investor attention, and stock return," International Review of Financial Analysis, Elsevier, vol. 90(C).
    14. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    15. Papadamou, Stephanos & Fassas, Athanasios P. & Kenourgios, Dimitris & Dimitriou, Dimitrios, 2023. "Effects of the first wave of COVID-19 pandemic on implied stock market volatility: International evidence using a google trend measure," The Journal of Economic Asymmetries, Elsevier, vol. 28(C).
    16. Pikulina, Elena & Renneboog, Luc & Ter Horst, Jenke & Tobler, Philippe N., 2014. "Bonus schemes and trading activity," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 369-389.
    17. D’Hondt, Catherine & De Winne, Rudy & Merli, Maxime, 2021. "Do retail investors bite off more than they can chew? A close look at their return objectives," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 879-902.
    18. Wang, Chen & Shen, Dehua & Li, Youwei, 2022. "Aggregate Investor Attention and Bitcoin Return: The Long Short-term Memory Networks Perspective," Finance Research Letters, Elsevier, vol. 49(C).
    19. Laurens Cherchye & Bram De Rock & Dieter Saelens, 2024. "Nonparametric analysis of financial portfolio performance," Working Papers ECARES 2024-08, ULB -- Universite Libre de Bruxelles.
    20. Cookson, J. Anthony & Lu, Runjing & Mullins, William & Niessner, Marina, 2024. "The social signal," Journal of Financial Economics, Elsevier, vol. 158(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:finrev:v:58:y:2023:i:2:p:287-313. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/efaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.