SSRN-All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors by Brad Barber, Terrance Ode

Ladies and gentlemen, we have now have more proof of what you may have long suspected: that investors do buy stocks that are in the news at a greater rate than other stocks.

If you remember, this idea was mentioned back when we were talking about the NCAA basketball tournement. It ws suggested that trying to pick winners (rather than going with the favorite) was in part because of the glamour of being able to brag about your picks. Similarly, this was seen as being nearly identical to William Berenstein's INEPT model whereby investors buy glamourous and "sexy" stocks so that they can brag about owning them.

Well now Barber and Odean have the evidence we have been lacking to support these theories:

SSRN-All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors by Brad Barber, Terrance Odean


Some highlights:

"In this paper, we test the hypotheses that (1) the buying behavior of individual investors is more heavily influenced by attention than is their selling behavior and that (2) the buying behavior of individual investors is more heavily influenced by attention than is the buying behavior of professional investors. We also develop a model based on the assumption that attention influences buying more than selling and we test the asset pricing predictions of our model. These predictions are (1) that stocks heavily purchased by attention-based investors will subsequently underperform stocks heavily sold by those investors and (2) that this underperformance will be greatest following periods of high attention."

"Since we cannot measure the daily attention paid to stocks directly, we do so indirectly. We focus on three observable measures that are likely to be associated with attention grabbing events: news, unusual trading volume, and extreme returns."

"As predicted, individual investors tend to be net buyers on high attention days. For
example, investors at the large discount brokerage make nearly twice as many purchases as sales of stocks experiencing unusually high trading volume (e.g, the highest five percent) and nearly twice as many purchases as sales of stocks with an extremely poor return (lowest 5 percent) the previous day. The buying behavior of the professionals is least influenced by attention."

"...we find that individual investors display attention based
buying behavior. They are net buyers on high volume days, net buyers following both extremely negative and extremely positive one-day returns, and net buyers when stocks are in the news....The institutional investors in our sample—especially the value strategy investors—do not display attention-based buying."

"Our theoretical model....predicts that when investors are most influenced by
attention, the stocks they buy will subsequently underperform those they sell. We find strong empirical support for this prediction.

AnotherI^3 paper!

Cite:
Barber, Brad M. and Odean, Terrance, "All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors" (January 2005). EFA 2005 Moscow Meetings Paper. http://ssrn.com/abstract=460660