Investor attention and the use of leverage

Abstract

We investigate the effects of using different sources of investment leverage, that is, securities with embedded leverage and traditional margin accounts, on the portfolio performance of retail investors, recognizing that these effects may be conditional on investor attention. We find that investors who trade on margin underperform those who do not have margin accounts; we also find that investors trading securities with embedded leverage show even poorer performance than investors trading on margin. The negative effect of leverage usage, however, decreases with greater investor attention, measured by portfolio monitoring frequency. Results suggest that more attentive investors gain more from using investment leverage.

What happens in Vegas stays in Vegas? Firsthand experience and EDGAR search activity in Las Vegas casino hotels

“…Given the mode and style of research access, we believe the effects observed in our study are likely driven by retail investors. Our study, therefore, contributes to this broader literature on retail investors, who are generally thought to be uninformed (Bouffler et al., 2023; Papadimitriou, 2023) and make inferior investment decisions relative to institutional investors (Barber & Odean, 2000, 2001; Barber et al., 2009, 2022, 2023; G. Chen et al., 2007; Davydov & Peltomaki, 2023; Grinblatt & Keloharju, 2000; Jones et al., 2023; Odean, 1999). Recent work by Ma et al.…”

“…Our study, therefore, contributes to this broader literature on retail investors, who are generally thought to be uninformed (Bouffler et al, 2023;Papadimitriou, 2023) and make inferior investment decisions relative to institutional investors (Barber & Odean, 2000Barber et al, 2009Barber et al, , 2022Barber et al, , 2023G. Chen et al, 2007;Davydov & Peltomaki, 2023;Grinblatt & Keloharju, 2000;Jones et al, 2023;Odean, 1999). Recent work by Ma et al (2022) finds that a wide dispersion in beliefs from retail investors leads to negative future stock returns.…”

Short selling and readability in financial disclosures: A controlled experiment

“…Firstly, both novice and sophisticated investors encounter constraints in attention and information processing capabilities (Fang et al., 2014). Secondly, investors tend to assign less weight, pay reduced attention to, and sometimes neglect complex and hard‐to‐process information (Cohen & Lou, 2012; Davydov & Peltomäki, 2023; Hirshleifer & Teoh, 2003; Hirshleifer et al., 2011; Peng & Xiong, 2006). Thirdly, firms capitalize on the limited attention of investors (Daniel et al., 2002).…”

Leverage Is a Double‐Edged Sword

“…Our account-level intraday data from futures markets offer a unique opportunity to study the effect of derivatives leverage on the cross-section of trading performance. To the best of our knowledge, our paper is the first to directly document the heterogeneous impact of leverage 8 In a recent paper, Davydov and Peltomäki (2023) consider leverage accruing from instruments such as leveraged ETFs and come to a similar conclusion as Heimer and Simsek (2019).…”