Unexpected Distractions and Investor Attention to Corporate Disclosures

• In Event: Investors disagreement and limited attention

Abstract

We investigate whether and to what extent investors are potentially distracted in their reactions to firm-specific disclosures. A key innovation of our study is the use of Eisensee and Stromberg's (2007) Daily News Pressure (DNP) index as a proxy for the presence of potential distraction. Since DNP is largely unpredictable and unrelated to investors' valuation decisions, it offers a unique opportunity to examine investor attention in the absence of strategic timing of disclosures by managers. We consider a broad set of corporate disclosures (earnings announcements, management forecasts, dividend announcements, stock repurchases, merger and acquisition announcements, and other announcements) to further explore how investor attention varies with disclosure type. Using overall trading and Google search volume as measures of investor attention, we find that investors are susceptible to distraction in their reactions to corporate disclosures. Our findings also reveal that investors exhibit differential attention to different types of disclosures and that retail investors are particularly susceptible to periods of inattention. Taken together, our findings are consistent with the view that investors exhibit periods of inattention that affect market outcomes.

Authors

• Doron Israeli, Arison School of Business, Interdisciplinary Center (IDC) Herzliya

• Ron Kasznik, Stanford University

• Suhas A Sridharan, Emory University