Market Efficiency And Retail Investor Attention

In this paper we focus on three major corporate events,including stock dividends,cash dividends,and ticker-changing events.We manage to document similar market reactions for all three events,and Chinese stock market tends to “overreact” to corporate announcements.The anomaly of overreaction here is defined as the positive price reaction on announcement dates and subsequent price reversal during postannouncement period.This paper attempts to study the price pattern by analyzing media coverage,market regulation and investor sentiment.Based on the retail-dominated structure in Chinese stock market,we aim to understand the relationship between retail investor attention(hereafter,RIA),investor behaviors and asset prices.Literature in Behavioral Finance claims that individual investors have limited attention,and thus under-react to new information.This under-reaction leads to price momentum,which is an overwhelming effect in developed markets.However,price reversal effect dominates the market in China.Therefore,this paper comes up with a theory and finds empirical evidence that RIA picks up sharply around corporate announcements.This abnormal retail attention(hereafter,ARA)amplifies individual investors' expectation on the company future cash flow.Over-confidence and over-trading from retail investors will thus lead to market over-reactions to announcement events.In this study,we attempt to analyze the rationality and irrationality in individual investors' decision making,and we aim at designing a better market regulation and investor education.Firstly,we manage to find that price anomaly of overreaction is significant and persistent among different corporate events,no matter whether the event conveys new information or fundamental information to the market.Regardless of the information conveyed,Chinese stock market generally overreacts to announcements.Secondly,we design theoretical model for RIA,and document the relationship between investor expectation and attention.Main finding is that the behavior around attention-grabbing events are different between institutional and individual investors,and that the difference can be attributed to retail investor attention and information advantage of institutional investors.The unique price discovery process implies an interesting game theory where institutional investors are harvesting on retail investor attention.Thirdly,with methodology of Behavioral Finance and Natural Experiment,we study the different market reactions in different media coverage,market regulation,and investor structure.High-profile events with higher level of retail investor attention,will trigger stronger overreactions.Comparatively,when properly regulated,and with higher proportion of institutional investor participation,we will see much less price anomaly.In conclusion,this paper comprehensively tests Chinese market efficiency,as reflected by the market reaction and price discovery around representative corporate announcements including stock dividend paying,cash dividend paying,and stock ticker changing events.We conjecture and find empirical evidence that retail investor attention is to some extend manipulated by media exposure and thus market overreacts.This paper contributes to the literature in the following aspects.Firstly,we conjecture a theoretical model,with assumptions of information asymmetry and difference in investor expectations.This model produces six propositions about different investor behaviors and different market environment.Secondly,empirical analysis provides evidence for six research hypotheses from the theoretical model.With attention measure based on search engine and big data,we manage to test the difference in market reaction and market efficiency,sorted by different investor structure,shortsale constraint,and market regulations.Lastly,we attempt to trace over-time trend in Chinese market efficiency,especially the recent irrational exuberance in ticker changes or high-ratio stock dividends.In order to identify the driver for market anomalies,we focus on market microstructure,market regulation,and investor rationality.Our study shows that proper media coverage and investor education are and will be beneficial to market efficiency on Chinese capital market.