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We provide a model in which a single psychological constraint, limited investor attention, explains both under- and over-reaction to different earnings components. Investor neglect of information in current-period earnings about future earnings induces post-earnings announcement drift and the pro fit anomaly. Neglect of earnings components causes accruals and cash flows to predict abnormal returns. We derive new untested empirical implications relating the strength of the drift, accruals, cash flows, and pro fit anomalies to the forecasting power of current earnings-related information for future earnings, the degree of investor attention to different types of information, and the volatilities of and correlation between accruals and cash flows. We also show that owing to costs of attention, in equilibrium some investors may decide not to attend to the implications of earnings or its components.
This paper explores the extent to which limited investor attention explains positive average stock returns around earnings announcements. I observe positive abnormal returns on days when firms announce the date earnings will be released (earnings notification days) and lower returns around earnings announcements when firms begin providing earnings notifications. I find a similar effect for other highly-visible news events occurring soon before earnings announcements and higher returns around earnings announcements and when retail investors are more actively acquiring information about the firm. My results suggest that the attention-grabbing effect of earnings announcements provides a partial explanation of positive average returns around earnings announcements.
Prior research documents capital market benefits of increased investor attention to accounting disclosures and media coverage, however little is known about how investors and markets respond to attention-grabbing events that reveal little nonpublic information. We use daily firm advertising data to test how advertisements, which are designed to attract consumers' attention, influence investors' attention and financial markets (i.e., spillover effects). Exploiting the fact that firms often advertise at weekly intervals, we use an instrumental variables approach to provide evidence that print ads, especially in business publications, trigger temporary spikes in investor attention. We further find that trading volume and quoted dollar depths increase on days with ads in a business publication. We contribute to research on how management choices influence firms' information environments, determinants and consequences of investor attention, and consequences of advertising for financial markets.
The Handbook of Investors' Behavior during Financial Crises provides fundamental information about investor behavior during turbulent periods, such the 2000 dot com crash and the 2008 global financial crisis. Contributors share the same behavioral finance tools and techniques while analyzing behaviors across a variety of market structures and asset classes. The volume provides novel insights about the influence and effects of regional differences in market design. Its distinctive approach to studies of financial crises is of key importance in our contemporary financial landscape, even more so since the accelerated process of globalization has rendered the outbreak of financial crises internationally more commonplace compared to previous decades. Encompasses empirical, quantitative and regulation-motivated studies Includes information about retail and institutional investor behavior Analyzes optimal financial structures for the development and growth of specific regional economies
We document that stocks with the strongest prior 12-month returns experience a significant average market-adjusted return of 1.58 percent during the five trading days before their earnings announcements and a significant average market-adjusted return of 1.86 percent in the five trading days afterward. These returns remain significant even after accounting for transactions costs. We empirically test two possible explanations for these anomalous returns. The first is that unexpectedly positive news hits the market over the few days prior to these firms' earnings announcements, and that unexpectedly negative news comes out just afterwards. The second possibility is that stocks with sharp run-ups tend to attract individual investors' attention, and investment dollars, particularly before their earnings announcements. We do not find evidence for an information-based explanation; however, our analysis suggests the possibility that the trading decisions of individual investors are at least partly responsible for the return pattern we observe.
This thesis first examines the determinants of earnings management in an international setting using the Limited Investor Attention Model of Hirshleifer and Teoh (2003). The model predicts that investor attention reduces earnings management. I have four key findings. First, I document that financial analysts curb adjusted absolute abnormal accruals and absolute performance-matched abnormal accruals in global firms. Second, I document that institutional block-holdings curb adjusted absolute abnormal accruals across the world. Third, I document that analyst following is related to more reduction in earnings management in common law countries than in code-law countries. Fourth, I find that institutional block-holders are more effective monitors in common law countries than in code law countries. This thesis also examines the relation between investor attention and stock mispricing of abnormal accruals in an international setting using the Limited Investor Attention Model of Hirshleifer and Teoh (2003). Consistent with the model's hypothesis that investor attention reduces stock mispricing, I document three key findings. First, I find a significant and negative correlation between stock mispricing and analyst following in global firms. Second, stock mispricing is negatively correlated with institutional ownership in U.S. firms. Stock mispricing is not significantly correlated with institutional block-holdings in global firms. Third, stock mispricing per dollar of abnormal accrual is decreasing in analyst following for sufficiently large abnormal accruals in U.S. and global firms.
This book presents selected papers on the factors that serve to influence an individual’s capacity in financial decision-making. Initial chapters provide an overview of the cognitive factors affecting financial decisions and suggest a link between limited cognitive capacity and the need for financial education. The book then expands on these cognitive limitations to explore the tendency for overconfidence in decision-making and the interplay between rational and irrational factors. Later contributions show how credit card companies benefit from limitations in consumer financial literacy, how gender and cognition intersect to play an important role in financial decision-making, and how to improve financial capacity through financial literacy and education campaigns, including those addressing developed marketplaces. This comprehensive collection of papers will be of value to all readers who seek to better understand the multi-factorial and complex nature of personal financial management in today’s economic climate.