Attention allocation and return co-movement: Evidence from repeated natural experiments

Abstract

We study how attention allocation affects the composition of market/industry and firm-specific information in stock prices via repeated natural experiments. Using large jackpots of Taiwanese nationwide lotteries as exogenous shocks to investors' attention, we find: (1) individual stock returns co-move more with the market/industry returns on large jackpot days; (2) large jackpots have stronger effects on stock returns' co-movement with the market than with the industry; (3) the effect of large jackpots on return co-movement is stronger for stocks preferred by retail investors; and (4) the market under-reacts to firms' earnings surprises on large jackpot days and reverts within one week. Our findings are consistent with the existing theory that attentionconstrained investors focus more on market-and sector-level information than on firm-specific information. * We appreciate the helpful comments from Yifei Mao, Yu Yuan, Dexin Zhou, Shaojun Zhang, and seminar participants at University of Hong Kong. Tse-Chun Lin gratefully acknowledges research support from the Faculty of Business and Economics at the University of Hong Kong and the Research Grants Council of the Hong Kong SAR government. All errors remain the responsibility of the authors.

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