Limited attention to detail in financial markets: Evidence from reduced-form and structural estimation

Henrik Cronqvist, Tomislav Ladika, Elisa Pazaj and Zacharias Sautner

Journal of Financial Economics, 2024, vol. 154, issue C

Abstract: We show that firm valuations fell after a key expense became more visible in financial statements. FAS 123-R required firms to deduct option compensation costs from earnings, instead of disclosing them in footnotes. Firms that granted high option pay experienced earnings reductions, while fundamentals remained unchanged. These firms were more likely to miss earnings forecasts, and they experienced recommendation downgrades and valuation declines. Our findings suggest that market participants exhibited limited attention to option costs before FAS 123-R. As we reuse the FAS 123-R natural experiment, we show how one can address confounding channels by integrating reduced-form and structural estimation.

Keywords: Limited attention; Financial analysts; Option compensation; Learning; Reusing natural experiments; Structural estimation (search for similar items in EconPapers)
JEL-codes: C18 G32 G35 G41 M41 M52 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:154:y:2024:i:c:s0304405x24000345

DOI: 10.1016/j.jfineco.2024.103811

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