Attention and Underreaction-Related Anomalies

Xin Chen, Wei He (), Libin Tao () and Jianfeng Yu
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Xin Chen: Shenzhen Audencia Business School - Shenzhen University [Shenzhen]

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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.

Keywords: factors underreaction inattention mispricing risk; factors; underreaction; inattention; mispricing; risk; Factors Underreaction Inattention Mispricing Risk; Factors; Underreaction; Inattention; Mispricing; Risk (search for similar items in EconPapers)
Date: 2022-03-09
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Citations: View citations in EconPapers (1)

Published in Management Science, 2022, 69, pp.636 - 659. ⟨10.1287/mnsc.2022.4332⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04000496

DOI: 10.1287/mnsc.2022.4332

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