Attention and Underreaction-Related Anomalies

Recent studies have proposed a large set of powerful anomaly-based factors in the stock market. This study examines the role of investor inattention in the corresponding anomalies underlying these factors and other underreaction-related anomalies. Using media coverage as a proxy for investor attention, we show that the anomalies underlying many recently proposed prominent factors are much more pronounced among firms with low media coverage in portfolio-formation periods. In addition, we find many other prominent anomalies that previous literature has attributed to underreaction also tend to perform much better among firms with low media coverage. The average Fama-French five-factor alpha spread of these anomalies is about 0.97% per month among firms with low news coverage and only 0.24% per month among firms with high news coverage. Moreover, most of the alpha spread comes from the short leg of the anomalies and from the firms that are more difficult to arbitrage. Overall, our evidence indicates that investor inattention at least partially drives many of the recently proposed factors. This paper was accepted by Haoxiang Zhu, finance. Funding: L. Tao received financial support from the National Natural Science Foundation of China [Grant 72171050], the Ministry of Education Project of Humanities and Social Sciences [Grant No. 17YJCZH161], and the University of International Business and Economics Fund for Distinguished Young Scholars [Grant No. 18JQ07]. J. Yu acknowledges financial support from the National Natural Science Foundation of China [Grant No. 71790591]. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2022.4332 .