Sentiment, limited attention and mispricing

• Main Authors: DUAN, Xinrui, GUO, Li, LI, Frank Weikai, Jun TU
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2020
• Subjects: Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6799
• Institution: Singapore Management University

We examine whether various anomalies can be driven by two common behavioral forces, namely, ``subjective'' sentiment (representing investors' subjective biased beliefs) and ``objective'' limited attention (representing investors' objective cognitive constraints). While sentiment explains well many anomalies that are more speculative on the short-leg, it fails to explain anomalies that are equally speculative on the long and short-leg, including momentum and post-earnings announcement drift. Market-wide attention shifts, proxied by number of news averaged across stocks, significantly attenuates underreaction-driven anomalies, beyond the effect of sentiment. Our findings suggest that increase in market-wide attention can temporarily reduce the cost of attending to market and improve price efficiency.