Essays on Investor Attention

This thesis investigates retail and institutional investor attention and their effects on the dynamics of asset pricing. First, it examines the attention implications on the liquidity of cross section of stocks, as well as seasonal patterns of investor attention. It documents that increased attention leads to improved liquidity, which is particularly prominent for stocks of smaller firms while large firms benefit far less from higher investor attention, as suggested by models of investor recognition. The findings also provide evidence of attention seasonality, demonstrating significantly higher levels of investor attention during the month of July, in line with the pre-holiday effect. Second, it examines investor attention on a recent sample of S&P 500 index additions in the context of anticipatory trading effects. It finds that risk arbitrageurs anticipate the outcome of the index review and purchase stocks that have a high likelihood of becoming new index members, exploiting the mean price increase that comes with the addition announcement. These findings are referred to as the pre-announcement index effect. Moreover, it documents that the observed effect is largely driven by low-beta stocks, consistent with the betting-against-beta investment style approach. Persistent volume and stock price changes following the index addition confirm investor attention hypothesis. Third, it studies inventor attention within the framework of M&A announcements, investigating whether market anticipation may be the cause of well documented pre-bid price run-up in target firms. It finds that investor attention to target firms significantly increases two weeks ahead of the M&A announcement. Given that surge in attention must be supported by a large population and is unlikely to be triggered by a few corporate insiders, the results suggest that the observed run-up is likely to be caused by investors' anticipation of the impending deals. Analysis of abnormal return and trading volume dynamics provide further evidence in support of this view.