RFS Advance Access originally published online on December 24, 2007
Review of Financial Studies 2008 21(2):785-818; doi:10.1093/rfs/hhm079
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All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors
Graduate School of Management, University of California, Davis
Haas School of Business, University of California, Berkeley
Address correspondence to Terrance Odean, Haas School of Business, University of California, Berkeley, CA 94720-1900; telephone: 510-642-6767; e-mail: odean{at}berkeley.edu.
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Abstract |
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We test and confirm the hypothesis that individual investors are net buyers of attention-grabbing stocks, e.g., stocks in the news, stocks experiencing high abnormal trading volume, and stocks with extreme one-day returns. Attention-driven buying results from the difficulty that investors have searching the thousands of stocks they can potentially buy. Individual investors do not face the same search problem when selling because they tend to sell only stocks they already own. We hypothesize that many investors consider purchasing only stocks that have first caught their attention. Thus, preferences determine choices after attention has determined the choice set.
We appreciate the comments of Jonathan Berk, David Blake, Ken French, Simon Gervais, John Griffin, Andrew Karolyi, Sendhil Mullainathan, Mark Rubinstein, and Brett Trueman. We also appreciate the comments of seminar participants at Arizona State University; the Behavioral Decision Research in Management Conference; the University of California, Berkeley; the University of California, Irvine; the Copenhagen Business School; Cornell University; Emory; HEC; Norwegian School of Economics and Business Administration; Ohio State University; Osaka University; the Q Group; the Stanford Institute for Theoretical Economics; the Stockholm School of Economics; the University of Tilburg; Vanderbilt; the Wharton School; the CEPR/JFI symposium at INSEAD; Mellon Capital Management; the National Bureau of Economic Research; the Risk Perceptions and Capital Markets Conference at Northwestern University; and the European Finance Association Meeting. We are grateful to the Plexus Group, to BARRA, to Barclays Global Investors—for the Best Conference Paper Award at the 2005 European Finance Association Meeting, to the retail broker and discount brokers who provided us with the data for this study, and to the Institute for Quantitative Research and the National Science Foundation (grants SES-0111470 and SES-0222107) for financial support. Shane Shepherd, Michael Foster, and Michael Bowers provided valuable research assistance. All errors are our own.