Limited attention, trading volume, and return predictability.

摘要

The importance of investor attention in understanding returns and investor behaviors in the stock market has been increasing in finance literature. In this dissertation I find strong support for investor attention as one of potential explanations for the return predictability of abnormal trading activity recently documented in the finance literature (Gervais, Kaniel, and Mingelgrin(2001)). These authors name such return predictability the high volume return premium and propose in what they call the visibility hypothesis that increased investor attention after abnormal trading activity drives such a phenomenon.;In the first half of the dissertation, I provide strong evidence for the role investor attention plays by testing hypotheses implied by the visibility hypothesis proposed by these authors. First, cross-sectionally, stocks that have been receiving less investor attention should exhibit higher returns when there is abnormal trading activity. Secondly, stocks with abnormal trading activity when investors are paying less attention to the market as a whole should exhibit higher returns than when investors are paying more attention. I find strong evidence consistent with these hypotheses.;In the second part, I provide further evidence for the visibility hypothesis by examining quarterly institutional holdings data. First, I find that the growth rate of the number of institutional investors is high after a trading volume shock. Second, excess aggregate institutional holdings from the mean decrease rather than increase after a trading volume shock. However, average holdings per institution are not affected, which implies that the change in the breadth of ownership, not each institutional investor accumulating shares drives the high volume return premium. Third, institutional trading activity significantly increases after a trading volume shock, but the proportion of institutional trading activity relative to the total trading activity decreases, implying individual investors are more subject to attention-grabbing events.;Collective evidence in this dissertation suggests that investors strongly react to significant changes in trading activity in the stock. This appears to hold true for institutional investors who are often depicted as arbitrageurs counterbalancing irrational trading behaviors of individual investors. Thus, this research highlights the importance of investors' (limited) attention in explaining stock returns and investor behaviors in the stock market.