Attention Allocation And Information Diffusion

Limited Attention is a crucially important theory in the area of behavioral finance. Based on the related concepts in cognitive psychology, this theory loose the assumption of infinite investor rationality in traditional financial theory and state that instead of infinite attention, investors have to allocate their cognitive resources carefully among the markets and assets they followed, affected by the constraints of information collecting and processing. Limited attention theory shares the features of excellent acceptability and profound academic inspiration, making it more and more popular in recent years.Inspired by many existed literatures, this paper mainly focuses on the theme of attention allocation and information diffusion--specifically, how investors’ attention allocation affects the stock return comovement, and how information media function in this process. The empirical results show that with the increase of attention allocation to a certain stock, more corporate-leveled information is reflected in the stock price, which lowers the synchronization between stock return, industry return and market return, and improves the price informativeness. Additionally, as important information media, the "informed investors"--financial analysts and institutional investors can transmit related signals towards the market through analyst coverage and institutional stock holding. The empirical results also prove that these signals are interpreted correctly and reinforce the positive relation between investor attention and stock return nonsynchronization, with "category learning" behaviors not being triggered.At last, this paper raises the point that the conclusion drawn above can be reinforced or weakened by the macroeconomic environment change and investor sentiment, as the2008Financial Crisis may deteriorate the positive relation between investor attention and price informativeness, and the "informed investors" seem function better in signal convey when the whole economy is more stable and investors follow the media in a closer way.