Attention allocation and return co-movement: evidence from repeated natural experiments

Abstract

We study how attention allocation affects the composition of market/industry and firm-specific information in stock prices via repeated natural experiments. Using large jackpots of Taiwanese nationwide lotteries as exogenous shocks to investors’ attention, we find: (1) individual stock returns co-move more with the market/industry returns on large jackpot days; (2) large jackpots have stronger effects on stock returns’ co-movement with the market than with the industry; (3) the effect of large jackpots on return co-movement is stronger for stocks preferred by retail investors; and (4) the market under-reacts to firms’ earnings surprises on large jackpot days and reverts within one week. Our findings are consistent with the existing theory that attention-constrained investors focus more on market- and sector-level information than on firm-specific information.