The attention effect on Finnish investors
1University of Oulu, Oulu Business School, Department of Finance, Finance
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Individual investors quite often face a search problem of which stock they should select from many choices that are presented in the stock markets. Individual investors commonly face search costs, information cots, analyst cost and short-sale constraints that could increase the difficulty regarding an investment decision concerning which stock to buy from the market. Typically, when individual investors need to make a complex decision they tend to limit their problem by putting the stocks that have captured their attention into a consideration set. From this set, investors ease their decision whether to buy or sell a stock on the basis of their personal preferences. The scarce availability of information and the investor’s inability to retrieve relevant information causes investors to base their investment decisions on irrelevant factors such as stocks which grab their attention. These investment decisions are often regarded as irrational due to the fact that they are not on the basis of good analytical research but on factors which not necessarily provide good information whether stocks should be bought or sold. The paper uses the assumptions that are provided from the Barber and Odean (2008) study about the effect of attention to research the trading behavior on Finnish investors. In times when information is limited the few factors that remain visible to the individual investors are trading volume and stock returns. The paper uses abnormal trading volume and positive and negative stock returns as proxies for attention in order to analyze the effect of attention. The paper finds that individual investors tend to be affected by attention but the results although somewhat different are consistent with the Barber and Odean (2008) study. Passive or less experienced individual investors are found to have negative buy-sell imbalances which are mostly large in the extreme deciles, while active and experienced individual investors are found to have positive imbalances that are also large in the extreme deciles. In general, the trading performance is not affected by attention for the most active individual investors since they record a superior performance having to buy stocks which consequently deliver subsequent positive returns. On the other hand, passive individual investors tend to sell stocks that will provide them subsequent negative returns which in fact hurt their trading performance this finding is mostly documented in class 3 individual investors. Institutional investors have been found not to be influenced by attention, thus their imbalances vary across all deciles for sorts on the basis of abnormal volume and stock returns. Their trading performance usually is good since they buy/sell stocks that earn positive/negative returns although some institutional investors record the opposite performance. The importance of this study is that in general it confirms the assumptions of Barber and Odean (2008) that individual investors in Finland do base their choices on the basis of attention.
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