Article

Retail Investor Attention and Stock Liquidity

SSRN Electronic Journal 03/2013; DOI: 10.2139/ssrn.1786762

ABSTRACT We use the search volume index (SVI) of stock ticker provided by Google Trends to capture the retail investor’s active attention on the S&P 500 stocks by following Da, Engelberg, and Gao (2011). Based on the analysis of data between January 2004 and December 2009, we show that the majority of the cross-sectional variation of SVI cannot be explained by the passive attention measures including online media coverage from Google News and advertising expenditures. We further find that firms with increased retail investor attention, reflected by the level and the change of SVI, are associated with a larger shareholder base and with significantly improved stock liquidity. The results are robust to the control of firm-specific characteristics that affect stock liquidity, and year and industry fixed effects. Our results remain consistent to alternative measures of stock liquidity. 【First version: 23 Jan 2011】

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Available from: Wenxuan Hou, Jul 07, 2014
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    ABSTRACT: We investigate a link between the performance of several security indexes in broad investment categories and investor attention as measured by Google search probability. We find that there is a significant short-term change in index returns following an increase in attention. Conversely, a shock to returns leads to a long-term change in attention. Given this evidence, we hypothesize that a change in index return or the sign of its return in the past can indicate the nature of the information that investors are paying attention to. Therefore, past returns should determine the impact of attention on the future returns and volatility. Indeed, we find significant interaction effects between lagged returns and attention. This result suggests that attention can alter predictability of index returns. Specifically, we demonstrate that increased investor attention diminishes return predictability and, therefore, improves market efficiency.
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