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Attention and Underreaction-Related Anomalies

Author

Listed:
  • Xin Chen

    (Shenzhen Audencia Business School - Shenzhen University [Shenzhen])

  • Wei He
  • Libin Tao
  • Jianfeng Yu

Abstract

Recent studies have proposed a large set of powerful anomaly-based factors in the stock market. This study examines the role of investor inattention in the corresponding anomalies underlying these factors and other underreaction-related anomalies. Using media coverage as a proxy for investor attention, we show that the anomalies underlying many recently proposed prominent factors are much more pronounced among firms with low media coverage in portfolio-formation periods. In addition, we find many other prominent anomalies that previous literature has attributed to underreaction also tend to performmuch better among firms with low media coverage. The average Fama-French five-factor alpha spread of these anomalies is about 0.97% per month among firms with low news coverage and only 0.24% per month among firms with high news coverage. Moreover, most of the alpha spread comes fromthe short leg of the anomalies and fromthe firms that aremore difficult to arbitrage. Overall, our evidence indicates that investor inattention at least partially drivesmany of the recently proposed factors.

Suggested Citation

  • Xin Chen & Wei He & Libin Tao & Jianfeng Yu, 2022. "Attention and Underreaction-Related Anomalies," Post-Print hal-04000496, HAL.
    • Handle: RePEc:hal:journl:hal-04000496
    DOI: 10.1287/mnsc.2022.4332
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    Cited by:

    1. Zhibing Li & Jie Liu & Xiaoyu Liu & Chonglin Wu, 2024. "Investor attention and stock price efficiency: Evidence from quasi‐natural experiments in China," Financial Management, Financial Management Association International, vol. 53(1), pages 175-225, March.

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