Limited Investor Attention and Stock Market Misreactions to Accounting Information

David Hirshleifer and Siew Hong Teoh

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We provide a model in which a single psychological constraint, limited investor attention, explains both under- and over-reaction to different earnings components. Investor neglect of information in current-period earnings about future earnings induces postearnings announcement drift, the strength of which is increasing with the persistence of earnings. Neglect of earnings components causes accruals and cash flows to predict abnormal returns. We derive new untested empirical implications relating the strength of the drift, accruals, and cash flow anomalies to the quality of earnings, to the number of distracting events, and to the volatilities of and correlation between accruals and cash flows.

Date: 2005-11
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Journal Article: Limited Investor Attention and Stock Market Misreactions to Accounting Information (2011)
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