Information Consumption and Asset Pricing

Abstract

We study whether firm and macroeconomic announcements that convey systematic information generate a return premium for firms that experience information spillovers. We use information consumption to proxy for investor learning during these announcements and construct ex ante measures of expected information consumption (EIC) to calibrate whether learning is priced. On days when there are information spillovers, affected stocks earn a significant return premium (5% annualized) and the capital asset pricing model performs better. The positive effect of the Federal Reserve Open Market Committee announcements on the risk premia of individual stocks appears to be modulated by EIC. Our findings are most consistent with a riskbased explanation. * Azi Ben-Rephael is with the Rutgers Business School. Bruce Carlin is with the Jones Graduate School of Business at Rice University. Zhi Da is with the Mendoza College of Business at University of Notre Dame. Ryan Israelsen is with the Broad College of Business at Michigan State University. We are grateful to Jules van Binsbergen;

How do investors price accrual risk during crises?

“…Specifically, we look at earnings announcement during 2020 shortly before the pandemic‐instigated meltdown. This choice is inspired by several studies that show that earnings announcements are significant corporate events followed closely and acted upon by investors (Chambers & Penman, 1984, p. 39; Hirshleifer et al, 2009; Ben‐Rephael et al, 2020). Second, we analyse the pricing of past, accrued risk during past financial crises; namely the 2015 selloff and the 2008 global financial crisis.…”

“…Engelberg et al (2018) show that anomalous stock movements around big corporate events are 150% greater than their counterparts on any other no-news day. Ben-Rephael et al (2017) and Ben-Rephael et al (2020) document evidence that asset prices become more efficient on days of important economic announcements and intensified information consumption by investors. Collectively, these studies suggest that risk is not always priced contemporaneously.…”

Retail Attention, Institutional Attention

“…However, the arrival of information does not guarantee that the information is processed and incorporated into prices. As shown by Ben-Rephael, Da, and Israelsen (2017) and Ben-Rephael, Carlin, Da, and Israelsen (2021), institutional investor attention plays an important role in facilitating the incorporation of news and strongly affects risk premia.…”

“…Our article provides new insights into the roles retail and institutional investors play in financial markets. The conventional wisdom about retail investors is that retail attention is either associated with mispricing and speculative trading (Barber and Odean (2008), Da et al (2011), Andrei and Hasler (2015), and Yuan (2015)) or inconsequential (Ben-Rephael et al (2017), Ben-Rephael et al (2021). Our new results identify settings under which retail inattention is associated with slow incorporation of news into stock prices, hence contributing to the literature on the efficiency-enhancing role of retail investors Tetlock (2013), (2017), Boehmer et al (2021)).…”

Identifying the Effects of Macroeconomic Attention Through Foreign Investor Distraction

“…The use of stock market instrumental variables over a 20-day period also avoids having to estimate dynamic relationships between foreign and domestic markets at higher frequencies, which are further complicated by cross-country time zone differences.3 A positive association between information processing and risk premiums is also documented empirically byBen-Rephael, Carlin, Da, and Israelsen (2020) and theoretically byAi, Bansal, and Jianyu Han (2022), the latter deriving preannouncement drift through endogenous information acquisition rather than early leaks.…”