NOT ALL NEWS IS CREATED EQUAL: AN ANALYSIS OF INVESTOR ATTENTION AND STOCK REACTIONS

Abstract

This study focuses on the relationship between investor attention and a stock’s reaction to event shocks, using FDA approvals as the unexpected event. Analyst forecast revisions preceding the FDA approvals within a time window of 30 days are taken as a gauge for heightened investor attention. Regression analysis shows that the heightened investor attention generates statistically significant abnormal stock returns only in the short run, consistent with the efficient market hypothesis. The heightened investor attention, however, also leads to sustained, statistically significant abnormal trading activity, with the direction of the deviation from the normal trading level determined by whether the investor attention was associated with positive or negative expectations. Even after a stock experienced a large, positive short-term abnormal return, investor attention that anticipated negative outcomes still caused trading activity to depress in both the short and the long term. A possible explanation that relates investors’ willingness to act to the expected outcome is proposed.