Does limited attention constrain investors’ acquisition of firm-specific information?
Journal of Business Finance & Accounting, 41(9) & (10), 1361–1392, November/December 2014, 0306-686X
Yi Dong and Chenkai Ni
According to the framework outlined in Peng and Xiong (2006), attention-constrained investors tend to process more market- and sector-level information. We empirically test this theory. We find that firms with higher media coverage have lower contemporaneous stock return synchronicity. Such an effect is robust to analyses within size deciles, inclusion of firm fixed effects, estimation using a matched sample, and a two-stage least squares approach. The effect becomes less pronounced during the financial crisis period when both the quantity and quality of firm-specific information decrease. Further, the attention from media coverage has a spill-over effect on the firm’s industry peers without media coverage. Finally, investors of firms with higher media coverage are more efficient in incorporating future firm performance into current stock prices. Collectively, our findings support the theory in Peng and Xiong (2006) that investors increase their acquisition of firm-specific information when a firm captures their attention.