Investor Attention,Neglected Firm Effect And Stock Returns

Asset prices are affected by the information in the financial markets.However,past research has shown that investor only have very limited time and ability to forces attention on and analysis these information.Baber and Odean(2008)further point out that "limited attention" would influence stock prices and lead it separate from fundamentals.This article has attempted to find an ideal proxy to describe investor attention,and carry out a research into the mutual feedback relation between investor attention,stock price and trading volume.The research of this paper reveals that,using data from Choice investor watchlist as the proxy of investor attention,could fairly describe the characteristic of investor attention.This paper has collected 244 trading days and 131 weeks trading data of every stock in Chinese securities market,and applies fixed effects regression model to study over two thousand stocks,tests the relationship between investor attention,stock price and trading volume.The results indicate that an increase in investor attention predicts higher stock price in 5 days and lower stock price in four weeks.Second,an increase in investor attention also predicts higher stock trading volume in the week and lower trading volume in the next week,this negative impact will decline in the next three weeks.Moreover,the research of this paper found an increase in investor attention,stock price or trading volume predicts higher investor attention in the future.Finally,this paper identified the "Neglected firm effect",which means lesser-known firms producing abnormally high returns on their stocks,in Chinese securities markets,and the phenomenon will last to a few weeks later.The research results of the paper further enrich the theory of limited attention,over-reaction and under-reaction of the behavioral finance,provide a new visual angle for us to understand financial assets price behavior in the short and medium term.As for investment practice,the research of this paper prove in the theory that invest"neglected firm" can gain excess returns.Finally,this paper puts forward policy recommendations:we need to enhance oversight and regulation of the securities market,prevent individual investors from lost their money because of price manipulation and disinformation.