Investor Inattention and the Underreaction to Stock Recommendations

Roger K. Loh

Financial Management, 2010, vol. 39, issue 3, 1223-1252

Abstract: Investors’ reaction to stock recommendations is often incomplete so that there is a predictable postrecommendation drift. I investigate investor inattention as a plausible explanation for this drift by using prior turnover as a proxy for attention. I find that low‐attention stocks react less to stock recommendations than high‐attention stocks around the three‐day event window. Subsequently, the recommendation drift of firms with low attention is more than double in magnitude when compared to firms with high attention. Similar conclusions are reached with alternative proxies for attention. The evidence supports investor inattention as a source of the stock recommendation drift.

Date: 2010
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