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Attention for the Inattentive: Positive Effects of Negative Financial Shocks

Author

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  • Paige Ouimet
  • Geoffrey Tate

Abstract

Using unique data on employee ownership plans, we find that negative shocks lead to changes in portfolio choices among previously inattentive investors. Employees within employee ownership plans did not actively select into ownership, but instead received grants upon employment. Many employees remain initially passive within these plans. However, following the 2008 Financial Crisis, they become more likely to exercise options, sell restricted stock, and participate in an Employee Stock Purchase Plan (ESPP). These changes likely improve welfare. For example, nonparticipation in an ESPP leaves money on the table. Our results improve our understanding of how investors’ personal return experiences affect investment choices. Negative shocks can increase attention among previously passive investors, yielding decisions that are closer to the optimum.

Suggested Citation

  • Paige Ouimet & Geoffrey Tate, 2020. "Attention for the Inattentive: Positive Effects of Negative Financial Shocks," Review of Finance, European Finance Association, vol. 24(3), pages 615-646.
    • Handle: RePEc:oup:revfin:v:24:y:2020:i:3:p:615-646.
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    File URL: http://hdl.handle.net/10.1093/rof/rfz016
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    Cited by:

    1. Cornaggia, Kimberly & Hund, John & Nguyen, Giang, 2022. "Investor attention and municipal bond returns," Journal of Financial Markets, Elsevier, vol. 60(C).

    More about this item

    Keywords

    Attention; Financial crisis; Employee ownership; ESPP;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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