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Negativity Bias in Attention Allocation: Retail Investors’ Reaction to Stock Returns

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  • Tomas Reyes

Abstract

We argue that negative stock market performance attracts more attention from retail investors than comparable positive performance. Specifically, we test and confirm the hypothesis that retail investors pay more attention to negative extreme returns than positive ones. We present a measure of attention at the aggregate and company‐specific levels using Google's internet search volume indexes. These measures correlate with, but are different from, existing proxies of attention. Our empirical results strongly support the position that investors display a negativity bias in attention allocation with respect to extreme stock returns. Across all specifications, lagged negative extreme returns are stronger predictors of high attention at the individual‐stock and stock market levels than positive ones.

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  • Tomas Reyes, 2019. "Negativity Bias in Attention Allocation: Retail Investors’ Reaction to Stock Returns," International Review of Finance, International Review of Finance Ltd., vol. 19(1), pages 155-189, March.
    • Handle: RePEc:bla:irvfin:v:19:y:2019:i:1:p:155-189
    DOI: 10.1111/irfi.12180
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    Cited by:

    1. José Emilio Farinós & Begoña Herrero & Miguel Ángel Latorre, 2021. "Investor Inattention to All-Cash Acquisition Announcements: A Joint Day-Time Analysis in the Spanish Market," Sustainability, MDPI, vol. 13(2), pages 1-22, January.
    2. Mensi, Walid & Yousaf, Imran & Vo, Xuan Vinh & Kang, Sang Hoon, 2022. "Asymmetric spillover and network connectedness between gold, BRENT oil and EU subsector markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 76(C).
    3. Da, Zhi & Huang, Xing & Jin, Lawrence J., 2021. "Extrapolative beliefs in the cross-section: What can we learn from the crowds?," Journal of Financial Economics, Elsevier, vol. 140(1), pages 175-196.
    4. Lin, Mei-Chen, 2023. "Time-varying MAX preference: Evidence from revenue announcements," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    5. Sabbaghi, Omid, 2022. "The impact of news on the volatility of ESG firms," Global Finance Journal, Elsevier, vol. 51(C).
    6. Guillermo Badía & Luis Ferruz & Maria Céu Cortez, 2021. "The performance of social responsible investing from retail investors' perspective: international evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 6074-6088, October.
    7. Yuan, Ying & Wang, Haiying & Jin, Xiu, 2022. "Pandemic-driven financial contagion and investor behavior: Evidence from the COVID-19," International Review of Financial Analysis, Elsevier, vol. 83(C).
    8. Marmora, Paul, 2021. "Individual investor ownership and the news coverage premium," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 494-507.

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