Investor attention and market correction

• Published in: Review of behavioral finance 2021-10, Vol.13 (4), p.386-409
• Main Author: Chen, Zhongdong
• Format: Article
• Language: English
• Subjects: Behavioral economics; Investments; Investor behavior; Investors; Rates of return; Securities markets; Stock exchanges
• ISSN: 1940-5979; 1940-5987
• DOI: 10.1108/RBF-02-2020-0042

PurposeThis study disentangles the investor-base effect and the information effect of investor attention. The former leads to a larger investor base and higher stock returns, while the latter facilitates the dissemination of information among investors and impacts informational trading.Design/methodology/approachUsing positive volume shocks as a proxy for increased investor attention, this study evaluates the impacts of the investor-base effect and the information effect of investor attention on market correction following extreme daily returns in the US stock market from 1966 to 2018.FindingsThis study finds that the investor-base effect increases subsequent returns of both daily winner and daily loser stocks. The information effect leads to economically less significant return reversals for both the daily winner and daily loser stocks. These two effects tend to have economically more significant impacts on the daily loser stocks. The economic significance of these two effects is also related to firm size and the state of the stock market.Originality/valueThis study is the first to disentangle the investor-base effect and the information effect of increased investor attention. The evidence that the information effect facilitates the dissemination of new information and impacts stock returns contributes to the strand of studies on the impact of investor attention on market efficiency. This evidence also contributes to the strand of studies analyzing the impact of informational trading on stock returns. In addition, this study provides evidence for market overreaction and the subsequent correction. The results for up and down markets contribute to the literature on the investors' trading behavior.