Two Essays on Investor Attention and Asset Pricing

This dissertation explores the effect of investor attention, as measured by Google Search Volume Index, on security prices. It seeks to answer the following research questions: 1) what is the effect of investor attention on the expected returns of EREITs? And 2) what is the impact of investor attention on the open market repurchases post announcement returns? Classic theory suggests that information is immediately incorporated into stock prices. However, existing empirical evidence shows that investors are limited in terms of the amount of information they can process. Kahneman (1973) advances that attention is a scarce cognitive resource. Individuals suffer from bounded rationality. When faced with large amounts of information, they are limited in terms of how much they can process. This implies that prices may not reflect all available information due to limited investor attention. Essay 1 investigates the effect of investor attention on the expected returns of EREITs. The attention hypothesis of Barber and Odean (2008) suggests that increased attention leads to increased buying, which pushes prices and returns higher temporarily, but is followed by a reversal. We test the attention hypothesis on EREITs from 2004 to 2012 using Search Volume Index (SVI) data in Google Trends. We find that EREITs that generate high investor attention, as measured by SVI, earn higher returns compared to EREITs that generate no investor attention. The results are driven by small stocks and stocks with high book to market ratio. We report that the SVI effect is not due to impediments to trade and conjecture that SVI increases investor recognition among EREITs that are characterized by information incompleteness, leading to higher returns. Over time, this increase in returns is followed by a reversal. Essay 2 uses the to generate insights into stock repurchases price drift. Using a of 318 firms that made repurchase announcements between and 2008 and which have weekly search volume data in Google Trends, we find that investor attention has an effect on the repurchase drift for stocks during the first year following the More high abnormal search volume leads to a positive effect on cumulative returns during the first year following the for small stocks, stocks with high idiosyncratic risk, low to repurchase price arbitrage idiosyncratic direct proxy individual investor search ABSTRACT This study investigates the effect of investor attention on the expected returns of EREITs. The attention hypothesis of Barber and Odean (2008) suggests that increased attention leads to increased buying, which pushes prices and returns higher temporarily, but is followed by a reversal. We test the attention hypothesis on EREITs from 2004 to 2012 using Search Volume Index (SVI) data in Google Trends. We find that EREITs that generate high investor attention, as measured by SVI, earn higher returns compared to EREITs that generate no investor attention. The results are driven by small stocks and stocks with high book to market ratio. We report that the SVI effect is not due to impediments to trade and conjecture that SVI increases investor recognition among EREITs that are characterized by information incompleteness, leading to higher returns. Over time, this increase in returns is followed by a reversal. by BM, past and highest value each characteristic, respectively. We sort each characteristic-based tercile into SVI SVI, low SVI, and high SVI. with no SVI are first identified. are divided into low and high SVI groups using the median value of SVI. We then compute the equal-weighed return of each portfolio during on EREITs returns at the level. LogTA on the 10% level. We conclude that SVI explanatory power EREITs effect of ABSTRACT Investors are limited in terms of the information they can process. According to the attention hypothesis, under-reaction in asset pricing is a result of the brain’s limitations in processing large amounts of information. The attention hypothesis is used to generate insights into stock repurchases price drift. Using a sample of 318 firms that made repurchase announcements between 2004 and 2008 and which have weekly search volume data in Google Trends, we find that investor attention has an effect on the repurchase drift for stocks during the first year following the announcement. More specifically, we find that high abnormal search volume leads to a positive effect on cumulative returns during the first year following the announcement for small stocks, stocks with high idiosyncratic risk, low market to book ratio, and low past return. Low abnormal search volume signals a decrease in investor attention and results in negative returns among all stocks. The results provide further support to the attention hypothesis.