Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-06T14:35:39.727Z Has data issue: false hasContentIssue false
  • English
  • Français

Distracted Institutional Investors

Published online by Cambridge University Press:  08 October 2018

Daniel Schmidt Open the ORCID record for Daniel Schmidt [Opens in a new window]
Get access Rights & Permissions [Opens in a new window]

Abstract

I investigate how distraction affects the trading behavior of professional asset managers. Exploring detailed transaction-level data, I show that managers with a large fraction of portfolio stocks that have an earnings announcement are significantly less likely to trade in other stocks, suggesting that these announcements divert attention from trading decisions for other stocks. This distraction effect is more pronounced for nonpassive managers who engage in active stock selection choices. Finally, I identify three channels through which distraction hurts managers’ performance: Distracted managers trade less profitably, incur slightly higher transaction costs, and are less likely to close losing positions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 6 , December 2019 , pp. 2453 - 2491
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

I thank Jennifer Conrad (the editor) and an anonymous referee for their helpful feedback. I also thank Jawad Addoum (AFA discussant), Martijn Cremers, Francesco Franzoni, Johan Hombert, Alberto Manconi, Clemens Otto, Joël Peress, Oliver Spalt (EFA discussant), Bastian Von Beschwitz, and participants at the 2016 American Finance Association (AFA) and European Finance Association (EFA) conferences. I acknowledge support by a public grant overseen by the French National Research Agency (ANR) as part of the Investissements d’Avenir program (IDEX Grant Agreement No. ANR-11-IDEX-0003-02/Labex ECODEC No. ANR-11-LABEX-0047).

References

Abel, A. B.; Eberly, J. C.; and Panageas, S.. “Optimal Inattention to the Stock Market.” American Economic Review, 97 (2007), 244–249.Google Scholar
Abel, A. B.; Eberly, J. C.; and Panageas, S.. “Optimal Inattention to the Stock Market with Information Costs and Transaction Costs.” Econometrica, 81 (2013), 1455–1481.Google Scholar
Aharony, J., and Swary, I.. “Quarterly Dividend and Earnings Announcements and Stockholders’ Returns: An Empirical Analysis.” Journal of Finance, 35 (1980), 1–12.Google Scholar
Anand, A.; Irvine, P.; Puckett, A.; and Venkataraman, K.. “Performance of Institutional Trading Desks: An Analysis of Persistence in Trading Costs.” Review of Financial Studies, 25 (2012), 557–598.Google Scholar
Barber, B. M., and Odean, T.. “All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors.” Review of Financial Studies, 21 (2008), 785–818.Google Scholar
Barberis, N., and Xiong, W.. “Realization Utility.” Journal of Financial Economics, 104 (2012), 251–271.Google Scholar
Beaver, W. H.“The Information Content of Annual Earnings Announcements.” Journal of Accounting Research, 6 (1968), 67–92.Google Scholar
Ben-Rephael, A.; Da, Z.; and Israelsen, R. D.. “It Depends on Where You Search: Institutional Investor Attention and Underreaction to News.” Review of Financial Studies, 30 (2017), 3009–3047.Google Scholar
Ben-Rephael, A., and Israelsen, R. D.. “Are Some Clients More Equal than Others? An Analysis of Asset Management Companies’ Execution Costs.” Review of Finance, 22 (2018), 1705–1736.Google Scholar
Bernard, V. L., and Thomas, J. K.. “Post-Earnings-Announcement Drift: Delayed Price Response or Risk Premium?” Journal of Accounting Research, 27 (1989), 1–36.Google Scholar
Bordalo, P.; Gennaioli, N.; and Shleifer, A.. “Salience and Asset Prices.” American Economic Review Papers and Proceedings, 103 (2013), 623–628.Google Scholar
Bordalo, P.; Gennaioli, N.; and Shleifer, A.. “Salience and Consumer Choice.” Journal of Political Economy, 121 (2014), 803–843.Google Scholar
Bordalo, P.; Gennaioli, N.; and Shleifer, A.. “Competition for Attention.” Review of Economic Studies, 83 (2016), 481–513.Google Scholar
Brunnermeier, M., and Nagel, S.. “Hedge Funds and the Technology Bubble.” Journal of Finance, 59 (2004), 2013–2040.Google Scholar
Brunnermeier, M., and Parker, J. A.. “Optimal Expectations.” American Economic Review, 95 (2005), 1092–1118.Google Scholar
Bushee, B. J.“Do Institutional Investors Prefer Near-Term Earnings over Long-Run Value?” Contemporary Accounting Research, 18 (2001), 207–246.Google Scholar
Bushee, B. J.; Jung, M. J.; and Miller, G. S.. “Conference Participations and the Disclosure Milieu.” Journal of Accounting Research, 49 (2011), 1163–1192.Google Scholar
Bushee, B. J., and Noe, C. F.. “Corporate Disclosure Practices, Institutional Investors, and Stock Return Volatility.” Journal of Accounting Research, 38 (2000), 171–202.Google Scholar
Caplin, A., and Leahy, J.. “Psychological Expected Utility Theory and Anticipatory Feelings.” Quarterly Journal of Economics, 116 (2001), 55–79.Google Scholar
Chakrabarty, B.; Moulton, P.; and Trzcinka, C.. “The Performance of Short-Term Institutional Trades.” Journal of Financial and Quantitative Analysis, 52 (2017), 1403–1428.Google Scholar
Chemmanur, T.; He, S.; and Hu, G.. “The Role of Institutional Investors in Seasoned Equity Offerings.” Journal of Financial Economics, 94 (2009), 384–411.Google Scholar
Chien, Y.; Cole, H. L.; and Lustig, H. N.. “Is the Volatility of the Market Price of Risk Due to Intermittent Portfolio Rebalancing?” American Economic Review, 102 (2012), 2859–2896.Google Scholar
Cohen, L., and Frazzini, A.. “Economic Links and Predictable Returns.” Journal of Finance, 63 (2008), 1977–2011.Google Scholar
Corwin, S. A., and Coughenour, J. F.. “Limited Attention and the Allocation of Effort in Securities Trading.” Journal of Finance, 63 (2008), 3031–3067.Google Scholar
Cosemans, M., and Frehen, R.. “Salience Theory and Stock Prices: Empirical Evidence.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2887956 (2017).Google Scholar
Coval, J. D., and Moskowitz, T. J.. “The Geography of Investment: Informed Trading and Asset Prices.” Journal of Political Economy, 109 (2001), 811–841.Google Scholar
Daniel, K.; Grinblatt, M.; Titman, S.; and Wermers, R.. “Measuring Mutual Fund Performance with Characteristic-Based Benchmarks.” Journal of Finance, 52 (1997), 1035–1058.Google Scholar
DellaVigna, S., and Pollet, J.. “Investor Inattention, Firm Reaction, and Friday Earnings Announcements.” Journal of Finance, 64 (2009), 709–749.Google Scholar
Dugast, J.“Unscheduled News and Market Dynamics.” Journal of Finance, 73 (2018), 2537–2586.Google Scholar
Eisele, A.; Tamara, N.; Parise, G.; and Peijnenburg, K.. “Trading Out of Sight: An Analysis of Cross-Trading in Mutual Fund Families.” Journal of Financial Economics, forthcoming (2019).Google Scholar
Fang, L.; Peress, J.; and Zheng, L.. “Does Media Coverage of Stocks Affect Mutual Funds’ Trading and Performance?” Review of Financial Studies, 27 (2014), 3441–3466.Google Scholar
Franzoni, F., and Plazzi, A.. “What Constrains Liquidity Provision? Evidence from Hedge Fund Trades.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2239327 (2015).Google Scholar
Frazzini, A.“The Disposition Effect and Underreaction to News.” Journal of Finance, 61 (2006), 2017–2046.Google Scholar
Frydman, C.; Barberis, N.; Camerer, C.; Bossaerts, P.; and Rangel, A.. “Using Neural Data to Test a Theory of Investor Behavior: An Application to Realization Utility.” Journal of Finance, 69 (2014), 907–946.Google Scholar
Goettler, R. L.; Parlour, C. A.; and Rajan, U.. “Equilibrium in a Dynamic Limit Order Market.” Journal of Finance, 60 (2005), 2149–2192.Google Scholar
Goettler, R. L.; Parlour, C. A.; and Rajan, U.. “Informed Trading in Limit Order Markets.” Journal of Financial Economics, 93 (2009), 67–87.Google Scholar
Goetzmann, W. N.; Kim, D.; Kumar, A.; and Wang, Q.. “Weather-Induced Mood, Institutional Investors, and Stock Returns.” Review of Financial Studies, 28 (2015), 73–111.Google Scholar
Goldstein, M.; Irvine, P.; Kandel, E.; and Weiner, Z.. “Brokerage Commissions and Institutional Trading Patterns.” Review of Financial Studies, 22 (2009), 5175–5212.Google Scholar
Golman, R.; Hagmann, D.; and Loewenstein, G.. “Information Avoidance.” Journal of Economic Literature, 55 (2017), 96–135.Google Scholar
Grinblatt, M., and Han, B.. “Prospect Theory, Mental Accounting, and the Disposition Effect.” Journal of Financial Economics, 78 (2005), 311–339.Google Scholar
Grinblatt, M., and Keloharju, M.. “What Makes Investors Trade?” Journal of Finance, 56 (2001), 589–616.Google Scholar
Handa, P., and Schwartz, R. A.. “Limit Order Trading.” Journal of Finance, 51 (1996), 1835–1861.Google Scholar
Hartzmark, S.“The Worst, the Best, Ignoring All the Rest: The Rank Effect and Trading Behavior.” Review of Financial Studies, 28 (2015), 1024–1059.Google Scholar
He, H., and Wang, J.. “Differential Information and Dynamic Behavior of Stock Trading Volume.” Review of Financial Studies, 8 (1995), 919–972.Google Scholar
Hirshleifer, D.; Lim, S. S.; and Teoh, S. H.. “Driven to Distraction: Extraneous Events and Underreaction to Earnings News.” Journal of Finance, 64 (2009), 2289–2325.Google Scholar
Hu, G.; McLean, R. D.; Pontiff, J.; and Wang, Q.. “The Year-End Trading Activities of Institutional Investors: Evidence from Daily Trades.” Review of Financial Studies, 27 (2014), 1593–1614.Google Scholar
Ingersoll, J. E., and Jin, L. J.. “Realization Utility with Reference-Dependent Preferences.” Review of Financial Studies, 26 (2013), 723–767.Google Scholar
Jame, R.“Liquidity Provision and the Cross-Section of Hedge Fund Returns.” Management Science, 64 (2018), 2973–3468.Google Scholar
Kacperczyk, M., and Seru, A.. “Fund Manager Use of Public Information: New Evidence on Managerial Skills.” Journal of Finance, 62 (2007), 485–528.Google Scholar
Kacperczyk, M.; Van Nieuwerburgh, S.; and Veldkamp, L.. “A Rational Theory of Mutual Funds’ Attention Allocation.” Econometrica, 84 (2016), 571–626.Google Scholar
Karlsson, N.; Loewenstein, G.; and Seppi, D.. “The Ostrich Effect: Selective Attention to Information.” Journal of Risk and Uncertainty, 38 (2009), 95–115.Google Scholar
Kempf, E.; Manconi, A.; and Spalt, O.. “Distracted Shareholders and Corporate Actions.” Review of Financial Studies, 30 (2017), 1660–1695.Google Scholar
Kim, O., and Verrecchia, R. E.. “Market Liquidity and Volume around Earnings Announcements.” Journal of Accounting and Economics, 17 (1994), 41–67.Google Scholar
Lu, Y.; Ray, S.; and Teo, M.. “Limited Attention, Marital Events and Hedge Funds.” Journal of Financial Economics, 122 (2016), 607–624.Google Scholar
Merton, R. C.“A Simple Model of Capital Market Equilibrium with Incomplete Information.” Journal of Finance, 42 (1987), 483–510.Google Scholar
Odean, T.“Are Investors Reluctant to Realize Their Losses?” Journal of Finance, 53 (1998), 1775–1798.Google Scholar
Patton, A. J., and Verardo, M.. “Does Beta Move with News? Firm-Specific Information Flows and Learning about Profitability.” Review of Financial Studies, 25 (2012), 2789–2839.Google Scholar
Pedersen, L. H. Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined. Princeton, NJ: Princeton University Press (2015).Google Scholar
Peng, L., and Xiong, W.. “Investor Attention, Overconfidence and Category Learning.” Journal of Financial Economics, 80 (2006), 563–602.Google Scholar
Peress, J., and Schmidt, D.. “Glued to the TV: Distracted Noise Traders and Stock Market Liquidity.” Journal of Finance, forthcoming (2019).Google Scholar
Puckett, Y., and Yan, X.. “The Interim Trading Skills of Institutional Investors.” Journal of Finance, 66 (2011), 601–633.Google Scholar
Reis, R.“Inattentive Consumers.” Journal of Monetary Economics, 53 (2006), 1761–1800.Google Scholar
Shefrin, H. M., and Statman, M. S.. “The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence.” Journal of Finance, 40 (1985), 777–790.Google Scholar
Sicherman, N.; Loewenstein, G.; and Seppi, D.. “Financial Attention.” Review of Financial Studies, 29 (2015), 863–897.Google Scholar
Stambaugh, R. F.“Presidential Address: Investment Noise and Trends.” Journal of Finance, 69 (2014), 1415–1453.Google Scholar
Van Nieuwerburgh, S., and Veldkamp, L.. “Information Acquisition and Under-Diversification.” Review of Economic Studies, 77 (2010), 779–805.Google Scholar
Verrecchia, R. E.“Information Acquisition in a Noisy Rational Expectations Economy.” Econometrica, 50 (1982), 1415–1430.Google Scholar
Vives, X.“Short-Term Investment and the Information Efficiency of the Market.” Review of Financial Studies, 8 (1995), 125–160.Google Scholar
Wermers, R.“Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transaction Costs, and Expenses.” Journal of Finance, 55 (2000), 1655–1695.Google Scholar
Supplementary material: File

Schmidt supplementary material

Schmidt supplementary material 1

Download Schmidt supplementary material(File)
File 240.4 KB