Asymmetric Attention and Stock Returns

Abstract

This paper constructs a new measure of attention allocation by local investors relative to nonlocals using aggregate search volume from Google. We first present a conceptual framework in which local investors optimally choose to focus their attention on local stocks when they receive private news, leading to an asymmetric allocation of attention between local and nonlocal investors. Consistent with the main prediction of this framework, we find that firms attracting abnormally high asymmetric attention from local relative to nonlocal investors earn higher returns. A portfolio that goes long in stocks with high asymmetric attention and short in stocks with low asymmetric attention has an alpha of 32 basis points per month. The results are stronger for stocks with a greater degree of information friction. The new measure of asymmetric attention allows one to infer the arrival of unobservable private information by observing investors’ attention allocation behavior. This paper was accepted by Karl Diether, finance.

The Geography of Investor Attention

“…These findings are consistent with a model where the local investors skew their attention allocation towards local asset because they are better at processing information about them, rather than because of behavioral biases. They are also consistent with the findings of other recent papers (Gargano and Rossi (2018), Cziraki, Mondria, and Wu (2021) and Dyer (2021)) documenting that investors' attention predicts stocks' risk-adjusted returns, and that this relationship is much stronger for local investors' attention.…”

“…Based on brokerage account data, Gargano and Rossi (2018) measure retail investors' attention based on the time they spend looking at data available via their brokerage account, and find that they devote more attention to local stocks, and that their attention level predicts stocks' risk-adjusted returns, and is particularly profitable when trading stocks with high uncertainty for which a lot of public information is available. Relatedly, Cziraki, Mondria, and Wu (2021), who also measure attention based on Google-search data, find that stocks featuring an abnormally large gap between local and nonlocal investors' attention earn higher risk-adjusted returns. These findings are consistent with ours, and with the idea captured by our model that retail investors' attention to public information confers them an informational advantage, and more so for local than for nonlocal investors.…”

Asset productivity, local information diffusion, and commercial real estate returns

“…Cziraki et al. (2020) find that firms’ stock returns are positively associated with the degree to which firms receive “asymmetric” attention from local investors. Korniotis and Kumar (2013) document a strong link between local business cycles and local stock returns because local investors tend to trade on a common local information set, which leads to correlated trading behavior that affects the prices of local stocks (Pirinsky & Wang, 2006).…”

Investor Attention from Internet Search Volume and Underreaction to Earnings Announcements in Korea

“…In the same vein, Bank et al [11] find that search frequency in Google to capture investor attention affects the liquidity and returns of German stocks. Mondria et al [21] and Cziraki et al [22] also use aggregate search volume as a measure of attention. By extension, Vlastakis and Markellos [23] and Drake et al [24] use search frequency as a proxy of information demand.…”