Investor attention and stock returns under negative shocks: an empirical analysis based on “Dragon and Tiger” list in China
Abstract
Using the “Dragon and Tiger” list, we construct a clean indicator that directly measures investor attention, empirically test the effect of investor attention on stock return under negative shocks and whether the effect is affected by the bull or bear market, the industry, firm size, age and state ownership, institutional shareholder holding percentage. The results show that i) an increase in investor attention negatively predicts stock returns when cumulative daily return of a stock listed on “Dragon and Tiger” list on listing day is negative; ii) Investor attention is negatively correlated with stock returns when the stock entered in “Dragon and Tiger” list experienced current cumulative monthly return is negative; iii) Investor attention is negatively correlated with stock returns when monthly cumulative net purchase amount of top 10 institution to the stock listed in “Dragon and Tiger” list is negative; iv) Investor attention is negatively correlated with stock returns when the stock listed in “Dragon and Tiger” list, the ratio of monthly cumulative trading amount of the top 10 institutional traders to total trading amount of the secondary market is in the bottom 30 percentile. These findings not only contribute to the academic research about the relationship between investor attention and stock return, but also provide some guidance to the financial regulatory agencies as to the capital market stability.
Keyword : investor attention, stock returns, negative shocks, “Dragon and Tiger” list, China
How to Cite
Zhai, X.- ying, Hou, Y.- ying, & Li, Y.- shun. (2020). Investor attention and stock returns under negative shocks: an empirical analysis based on “Dragon and Tiger” list in China. Journal of Business Economics and Management, 21(3), 914-941. https://doi.org/10.3846/jbem.2020.11836
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Conrad, J., Cornell, B., & Landsman, W. R. (2002). When is bad news really bad news? The Journal of Finance, 57(6), 2507–2532. https://doi.org/10.1111/1540-6261.00504
Cziraki, P., Mondria, J., & Wu, T. (2019). Asymmetric attention and stock returns. Management Science. https://doi.org/10.2139/ssrn.1772821
Da, Z., Engelberg, J., & Gao, P. (2011). In search of attention. Journal of Finance, 66(5), 1461–1499. https://doi.org/10.1111/j.1540-6261.2011.01679.x
Daniel, K., Hirshleifer, D., & Teoh, S. H. (2002). Investor psychology in capital markets: Evidence and policy implications. Journal of Monetary Economics, 49(1), 139–209. https://doi.org/10.1016/S0304-3932(01)00091-5
DellaVigna, S. (2009). Psychology and economics: evidence from the field. Journal of Economic Literature, 47(2), 315–372. https://doi.org/10.1257/jel.47.2.315
Engle, R. F., & Ng, V. K. (1993). Measuring and testing the impact of news on volatility. The Journal of Finance, 48(5), 1749–1778. https://doi.org/10.1111/j.1540-6261.1993.tb05127.x
Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25(2), 383–417. https://doi.org/10.2307/2325486
Fang, L., & Peress, J. (2009). Media coverage and the cross-section of stock returns. Journal of Finance, 64(5), 2023–2052. https://doi.org/10.1111/j.1540-6261.2009.01493.x
Gabaix, X., & Laibson, D. (2001). The 6D Bias and the equity premium puzzle. NBER Macroeconomics Annual, 16, 257–312. https://doi.org/10.1086/654447
Gao, Y., Wang, Y., Wang, C., & Liu, C. (2018). Internet attention and information asymmetry: Evidence from Qihoo 360 search data on the Chinese stock market. Physica: A: Statistical Mechanics and its Applications, 510, 802–811. https://doi.org/10.1016/j.physa.2018.07.016
Gervais, S., & Odean, T. (2001). Learning to be overconfident. The Review of Financial Studies, 14(1), 1–27. https://doi.org/10.1093/rfs/14.1.1
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Gouriéroux, C., & Monfort, A. (1992). Qualitative threshold ARCH models. Journal of Econometrics, 52(1–2), 159–199. https://doi.org/10.1016/0304-4076(92)90069-4
Guo, T., Finke, M., & Mulholland, B. (2015). Investor attention and advisor social media interaction. Applied Economics Letters, 22(4), 261–265. https://doi.org/10.1080/13504851.2014.937030
Han, L., Xu, Y., & Yin, L. (2018). Does investor attention matter? The attention-return relationships in FX markets. Economic Modelling, 68, 644–660. https://doi.org/10.1016/j.econmod.2017.06.015
Hirshleifer, D., & Teoh, S. H. (2003). Limited attention, information disclosure and financial reporting. Journal of Accounting and Economics, 36(1–3), 337–386. https://doi.org/10.1016/j.jacceco.2003.10.002
Hou, K., Xiong, W., & Peng, L. (2009). A tale of two anomalies: The implication of investor attention for price and earnings momentum (Working Paper). Ohio State University. https://doi.org/10.2139/ssrn.923146
Jin, X., & Zhou, J. (2014). The dynamic relationship between investor attention and market return: Evidences from a Bootstrap rolling-window. Journal of Zhejiang University (Humanities & Social Sciences Edition), 6, 98–111 (in Chinese). http://www.zjujournals.com/soc/CN/article/showNewArticle.do?pager=18
Joseph, K., Wintoki, M. B., & Zhang, Z. (2011). Forecasting abnormal stock returns and trading volume using investor sentiment: Evidence from online searchnternational Journal of Forecasting, 27(4), 1116–1127. https://doi.org/10.1016/j.ijforecast.2010.11.001
Kahneman, D., & Tversky, A. (1973). On the psychology of prediction. Psychological Review, 80(4), 237–251. https://doi.org/10.1037/h0034747
Kim, N., Lučivjanská, K., Molnár, P., & Villa, R. (2019). Google searches and stock market activity: Evidence from Norway. Financial Research Letters, 28, 228–220. https://doi.org/10.1016/j.frl.2018.05.003
Loh, R. K. (2010). Investor inattention and the underreaction to stock recommendations. Financial Management, 39(3), 1223–1251. https://doi.org/10.1111/j.1755-053X.2010.01110.x
Lou, D. (2014). Attracting investor attention through advertising. Review of Financial Studies, 27(6), 1797–1829. https://doi.org/10.1093/rfs/hhu019
Madsen, J., & Niessner, M. (2019). Is Investor attention for sale? The role of advertising in financial markets? Journal of Accounting Research, 57(3), 763–795. https://doi.org/10.2139/ssrn.2506872
Mbanga, C., Darrat, A. F., & Park, J. C. (2019). Investor sentiment and aggregate stock returns: The role of investor attention. Review of Quantitative Finance and Accounting, 53(2), 397–428. https://doi.org/10.1007/s11156-018-0753-2
Merton, R. C. (1987). A simple model of capital market equilibrium with incomplete information. Journal of Finance, 42(3), 483–510. https://doi.org/10.1111/j.1540-6261.1987.tb04565.x
Nelson, D. B. (1991). Conditional heteroscedasticity in asset returns: A new approach. Econometrica, 59(2), 347–370. https://doi.org/10.1016/B978-012598275-7.50004-1
Peltomäki, J., Graham, M., & Hasselgren, A. (2018). Investor attention to market categories and market volatility: The case of emerging markets. Research in International Firm and Finance, 44, 532–546. https://doi.org/10.1016/j.ribaf.2017.07.124
Peng, L., & Xiong, W. (2006). Investor attention, overconfidence and category learning. Journal of Financial Economics, 80(3), 563–602. https://doi.org/10.1016/j.jfineco.2005.05.003
Preis, T., Moat, H. S., & Stanley, H. E. (2013). Quantifying trading behavior in financial markets using Google Trends. Scientific Reports, 3, 1684. https://doi.org/10.1038/srep01684
Rabemananjara, R., & Zakoian, J. M. (1993). Threshold ARCH models and asymmetries in volatility. Journal of Applied Econometrics, 8(1), 31–49. https://doi.org/10.1002/jae.3950080104
Rao, Y., Peng, D., & Cheng, D. (2010). Does media attention cause abnormal return? – Evidence from China’s stock market. System Engineering – Theory and Practice, 2, 287–297 (in Chinese). http://en.cnki.com.cn/Article_en/CJFDTotal-XTLL201002015.htm
Rosa, R. S., & Durand, R. B. (2008). The role of salience in portfolio formation. Pacific-Basin Finance Journal, 16(1), 78–94. https://doi.org/10.1016/j.pacfin.2007.04.008
Seasholes, M. S., & Wu, G. (2007). Predictable behavior, profits and attention. Journal of Empirical Finance, 14(5), 590–610. https://doi.org/10.1016/j.jempfin.2007.03.002
Shi, Y., Tang, J., & Guo, K. (2017). The Study of social media investor attention and sentiment’s influence on Chinese stock market. Journal of Central University of Finance and Economics, 7, 45–53 (in Chinese). http://xbbjb.cufe.edu.cn/CN/article/searchArticle.do
Siganos, A. (2013). Google attention and target price run ups. International Review of Financial Analysis, 29, 219–226. https://doi.org/10.1016/j.irfa.2012.11.002
Sims, C. A. (2003). Implication of rational inattention. Journal of Monetary Economics, 50(3), 665–690. https://doi.org/10.1016/S0304-3932(03)00029-1
Skinner, D. J., & Sloan, R. G. (2002). Earnings surprises, growth expectations, and stock returns or Don’t let an earnings torpedo sink your portfolio. Review of Accounting Studies, 7(2–3), 289–312. https://doi.org/10.1023/A:1020294523516
Vlastakis, N., & Markellos, R. N. (2012). Information demand and stock market volatility. Journal of Banking & Finance, 36(6), 1808–1821. https://doi.org/10.1016/j.jbankfin.2012.02.007
Vozlyublennaia, N. (2014). Investor attention, index performance, and return predictability. Journal of Banking & Finance, 41, 17–35. https://doi.org/10.1016/j.jbankfin.2013.12.010
Wang, B., Choi, W., & Siraj, I. (2018). Local investor attention and post-earnings announcement drift. Review of Quantitative Finance and Accounting, 51(1), 219–252. https://doi.org/10.1007/s11156-017-0669-2
Yu, Q., & Zhang, B. (2012). Investors’ limited attention and stock returns – an empirical study using the Baidu index as a concern. Financial Research, 8, 152–165 (in Chinese).
Yuan, Y. (2015). Market-wide attention, trading, and stock returns. Journal of Financial Economics, 116(3), 548–564. https://doi.org/10.1016/j.jfineco.2015.03.006
Zhang, J., Liao, W., & Zhang, R. (2014). The effect of ordinary investors’ attention on volume and price of stock market: Empirical evidence based on Baidu index. Accounting Research, 8, 52–59 (in Chinese).
Barber, B. M., & Odean, T. (2008). All that glitters: The effect of attention and news on the buying behavior of individual and institutional investors. Review of Finance Studies, 21(2), 785–818. https://doi.org/10.1093/rfs/hhm079
Barberis, N., Shleifer, A., & Vishny, R. (1998). A model of investor sentiment. Journal of Financial Economics, 49(3), 307–343. https://doi.org/10.1016/S0304-405X(98)00027-0
Brooks, C. (2001). Double-threshold GARCH model for the French France/Deutschmark exchange rate. Journal of Forecasting, 20(2), 135–143. https://doi.org/10.1002/1099-131X(200103)20:2<135::AID-FOR780>3.0.CO;2-R
Colaco, H. M. J., De Cesari, A., & Hegde, S. P. (2017). Retail investor attention and IPO valuation. European Financial Management, 23(4), 691–727. https://doi.org/10.2139/ssrn.2804634
Conrad, J., Cornell, B., & Landsman, W. R. (2002). When is bad news really bad news? The Journal of Finance, 57(6), 2507–2532. https://doi.org/10.1111/1540-6261.00504
Cziraki, P., Mondria, J., & Wu, T. (2019). Asymmetric attention and stock returns. Management Science. https://doi.org/10.2139/ssrn.1772821
Da, Z., Engelberg, J., & Gao, P. (2011). In search of attention. Journal of Finance, 66(5), 1461–1499. https://doi.org/10.1111/j.1540-6261.2011.01679.x
Daniel, K., Hirshleifer, D., & Teoh, S. H. (2002). Investor psychology in capital markets: Evidence and policy implications. Journal of Monetary Economics, 49(1), 139–209. https://doi.org/10.1016/S0304-3932(01)00091-5
DellaVigna, S. (2009). Psychology and economics: evidence from the field. Journal of Economic Literature, 47(2), 315–372. https://doi.org/10.1257/jel.47.2.315
Engle, R. F., & Ng, V. K. (1993). Measuring and testing the impact of news on volatility. The Journal of Finance, 48(5), 1749–1778. https://doi.org/10.1111/j.1540-6261.1993.tb05127.x
Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25(2), 383–417. https://doi.org/10.2307/2325486
Fang, L., & Peress, J. (2009). Media coverage and the cross-section of stock returns. Journal of Finance, 64(5), 2023–2052. https://doi.org/10.1111/j.1540-6261.2009.01493.x
Gabaix, X., & Laibson, D. (2001). The 6D Bias and the equity premium puzzle. NBER Macroeconomics Annual, 16, 257–312. https://doi.org/10.1086/654447
Gao, Y., Wang, Y., Wang, C., & Liu, C. (2018). Internet attention and information asymmetry: Evidence from Qihoo 360 search data on the Chinese stock market. Physica: A: Statistical Mechanics and its Applications, 510, 802–811. https://doi.org/10.1016/j.physa.2018.07.016
Gervais, S., & Odean, T. (2001). Learning to be overconfident. The Review of Financial Studies, 14(1), 1–27. https://doi.org/10.1093/rfs/14.1.1
Glosten, L. R., Jagannathan, R., & Runkle, D. E. (1993). On the relation between the expected value and volatility of nominal excess returns on stocks. Journal of Finance, 48(5), 1779–1801. https://doi.org/10.1111/j.1540-6261.1993.tb05128.x
Gouriéroux, C., & Monfort, A. (1992). Qualitative threshold ARCH models. Journal of Econometrics, 52(1–2), 159–199. https://doi.org/10.1016/0304-4076(92)90069-4
Guo, T., Finke, M., & Mulholland, B. (2015). Investor attention and advisor social media interaction. Applied Economics Letters, 22(4), 261–265. https://doi.org/10.1080/13504851.2014.937030
Han, L., Xu, Y., & Yin, L. (2018). Does investor attention matter? The attention-return relationships in FX markets. Economic Modelling, 68, 644–660. https://doi.org/10.1016/j.econmod.2017.06.015
Hirshleifer, D., & Teoh, S. H. (2003). Limited attention, information disclosure and financial reporting. Journal of Accounting and Economics, 36(1–3), 337–386. https://doi.org/10.1016/j.jacceco.2003.10.002
Hou, K., Xiong, W., & Peng, L. (2009). A tale of two anomalies: The implication of investor attention for price and earnings momentum (Working Paper). Ohio State University. https://doi.org/10.2139/ssrn.923146
Jin, X., & Zhou, J. (2014). The dynamic relationship between investor attention and market return: Evidences from a Bootstrap rolling-window. Journal of Zhejiang University (Humanities & Social Sciences Edition), 6, 98–111 (in Chinese). http://www.zjujournals.com/soc/CN/article/showNewArticle.do?pager=18
Joseph, K., Wintoki, M. B., & Zhang, Z. (2011). Forecasting abnormal stock returns and trading volume using investor sentiment: Evidence from online searchnternational Journal of Forecasting, 27(4), 1116–1127. https://doi.org/10.1016/j.ijforecast.2010.11.001
Kahneman, D., & Tversky, A. (1973). On the psychology of prediction. Psychological Review, 80(4), 237–251. https://doi.org/10.1037/h0034747
Kim, N., Lučivjanská, K., Molnár, P., & Villa, R. (2019). Google searches and stock market activity: Evidence from Norway. Financial Research Letters, 28, 228–220. https://doi.org/10.1016/j.frl.2018.05.003
Loh, R. K. (2010). Investor inattention and the underreaction to stock recommendations. Financial Management, 39(3), 1223–1251. https://doi.org/10.1111/j.1755-053X.2010.01110.x
Lou, D. (2014). Attracting investor attention through advertising. Review of Financial Studies, 27(6), 1797–1829. https://doi.org/10.1093/rfs/hhu019
Madsen, J., & Niessner, M. (2019). Is Investor attention for sale? The role of advertising in financial markets? Journal of Accounting Research, 57(3), 763–795. https://doi.org/10.2139/ssrn.2506872
Mbanga, C., Darrat, A. F., & Park, J. C. (2019). Investor sentiment and aggregate stock returns: The role of investor attention. Review of Quantitative Finance and Accounting, 53(2), 397–428. https://doi.org/10.1007/s11156-018-0753-2
Merton, R. C. (1987). A simple model of capital market equilibrium with incomplete information. Journal of Finance, 42(3), 483–510. https://doi.org/10.1111/j.1540-6261.1987.tb04565.x
Nelson, D. B. (1991). Conditional heteroscedasticity in asset returns: A new approach. Econometrica, 59(2), 347–370. https://doi.org/10.1016/B978-012598275-7.50004-1
Peltomäki, J., Graham, M., & Hasselgren, A. (2018). Investor attention to market categories and market volatility: The case of emerging markets. Research in International Firm and Finance, 44, 532–546. https://doi.org/10.1016/j.ribaf.2017.07.124
Peng, L., & Xiong, W. (2006). Investor attention, overconfidence and category learning. Journal of Financial Economics, 80(3), 563–602. https://doi.org/10.1016/j.jfineco.2005.05.003
Preis, T., Moat, H. S., & Stanley, H. E. (2013). Quantifying trading behavior in financial markets using Google Trends. Scientific Reports, 3, 1684. https://doi.org/10.1038/srep01684
Rabemananjara, R., & Zakoian, J. M. (1993). Threshold ARCH models and asymmetries in volatility. Journal of Applied Econometrics, 8(1), 31–49. https://doi.org/10.1002/jae.3950080104
Rao, Y., Peng, D., & Cheng, D. (2010). Does media attention cause abnormal return? – Evidence from China’s stock market. System Engineering – Theory and Practice, 2, 287–297 (in Chinese). http://en.cnki.com.cn/Article_en/CJFDTotal-XTLL201002015.htm
Rosa, R. S., & Durand, R. B. (2008). The role of salience in portfolio formation. Pacific-Basin Finance Journal, 16(1), 78–94. https://doi.org/10.1016/j.pacfin.2007.04.008
Seasholes, M. S., & Wu, G. (2007). Predictable behavior, profits and attention. Journal of Empirical Finance, 14(5), 590–610. https://doi.org/10.1016/j.jempfin.2007.03.002
Shi, Y., Tang, J., & Guo, K. (2017). The Study of social media investor attention and sentiment’s influence on Chinese stock market. Journal of Central University of Finance and Economics, 7, 45–53 (in Chinese). http://xbbjb.cufe.edu.cn/CN/article/searchArticle.do
Siganos, A. (2013). Google attention and target price run ups. International Review of Financial Analysis, 29, 219–226. https://doi.org/10.1016/j.irfa.2012.11.002
Sims, C. A. (2003). Implication of rational inattention. Journal of Monetary Economics, 50(3), 665–690. https://doi.org/10.1016/S0304-3932(03)00029-1
Skinner, D. J., & Sloan, R. G. (2002). Earnings surprises, growth expectations, and stock returns or Don’t let an earnings torpedo sink your portfolio. Review of Accounting Studies, 7(2–3), 289–312. https://doi.org/10.1023/A:1020294523516
Vlastakis, N., & Markellos, R. N. (2012). Information demand and stock market volatility. Journal of Banking & Finance, 36(6), 1808–1821. https://doi.org/10.1016/j.jbankfin.2012.02.007
Vozlyublennaia, N. (2014). Investor attention, index performance, and return predictability. Journal of Banking & Finance, 41, 17–35. https://doi.org/10.1016/j.jbankfin.2013.12.010
Wang, B., Choi, W., & Siraj, I. (2018). Local investor attention and post-earnings announcement drift. Review of Quantitative Finance and Accounting, 51(1), 219–252. https://doi.org/10.1007/s11156-017-0669-2
Yu, Q., & Zhang, B. (2012). Investors’ limited attention and stock returns – an empirical study using the Baidu index as a concern. Financial Research, 8, 152–165 (in Chinese).
Yuan, Y. (2015). Market-wide attention, trading, and stock returns. Journal of Financial Economics, 116(3), 548–564. https://doi.org/10.1016/j.jfineco.2015.03.006
Zhang, J., Liao, W., & Zhang, R. (2014). The effect of ordinary investors’ attention on volume and price of stock market: Empirical evidence based on Baidu index. Accounting Research, 8, 52–59 (in Chinese).