Does Limited Attention Constrain Investors’ Acquisition of Firm‐specific Information?

Abstract

According to the framework outlined in Peng and Xiong (), attention‐constrained investors tend to process more market‐ and sector‐level information. We empirically test this theory. We find that firms with higher media coverage have lower contemporaneous stock return synchronicity. Such an effect is robust to analyses within size deciles, inclusion of firm fixed effects, estimation using a matched sample, and a two‐stage least squares approach. The effect becomes less pronounced during the financial crisis period when both the quantity and quality of firm‐specific information decrease. Further, the attention from media coverage has a spillover effect on the firm's industry peers without media coverage. Finally, investors of firms with higher media coverage are more efficient in incorporating future firm performance into current stock prices. Collectively, our findings support the theory in Peng and Xiong () that investors increase their acquisition of firm‐specific information when a firm captures their attention.

Social media, financial reporting opacity, and return comovement: Evidence from Seeking Alpha

“…Since Roll (1988), a considerable amount of research has identified links between comovement and investor protection and development of financial market, corporate governance, mandatory adoption of XBRL and newspaper coverage (Morck et al, 2000;Durnev et al, 2003;Crawford et al, 2012;Dong and Ni, 2014;Dong et al, 2016). Our study points to the role of social media in influencing stock return co-movement.…”

Media coverage of industry and the cross‐section of stock returns

“…To use an instrumental variable that is correlated with media coverage of industry but unrelated to stock return, the average IAT value of other industries that share the same first-level industry classification with the stock is selected. Dong and Ni (2014) document that a firm is more likely to seek media coverage when more peer firms appear in the media, furthermore, because the instrumental variable and the original industry are under the same first-level industry classification, they should share common shocks, fundamentals, information, and policies. Based on this understanding, this instrumental variable is likely to satisfy the relevance requirement.…”

“…Merton (1987) advanced the investor recognition hypothesis, and revealed that stocks with little media coverage are less recognised by investors, and therefore, they should offer higher equity premiums than these with good investor recognition, as a compensation of their holders for suffering from information asymmetry. This perspective is supported by numerous empirical studies that high media coverage has a negative impact on return in the short term, but this tendency reverses eventually (e.g., Chan, 2003; Chen et al ., 2014; Dong and Ni, 2014; Fang and Peress, 2009).…”

“…Because of limited attention constraint, investors are more likely to use stock categories (or styles) to simplify their asset allocation and diversification decision rather than conducting their own research and investing in individual stocks (Dong and Ni, 2014; Kahneman, 1973; Merton, 1987; Peng and Xiong, 2006). In particular, the strong bias in favour of domestic securities is a well‐documented characteristic of international investment portfolios, yet various studies show that investors tend to invest in the equities of local (or domestic) companies despite the benefits of diversification, which is mainly driven by informational differences between local and non‐local investors (Coval and Moskowitz, 1999).…”

Do corporate press releases drive media coverage?

“…In addition, we find that voluntary corporate disclosures have an incremental effect to media coverage, leading to 2 For example, Rogers, Skinner, and Zechman (2016) examine the disseminating role of the media and provide evidence that the financial press plays a significant role in price formation in capital markets through the wide dissemination of news. Acknowledging that investors are attention-constrained, Dong and Ni (2014) use stock return synchronicity as a proxy for the proportion of firm-specific information in stock prices, and find that firms with higher media coverage have less synchronous stock returns.…”