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Limited Attention and the Allocation of Effort in Securities Trading




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    • Shane Corwin is from the University of Notre Dame, Mendoza College of Business. Jay Coughenour is from the University of Delaware, Lerner College of Business and Economics. We thank Rob Stambaugh (the Editor) and an anonymous referee for their comments and suggestions. We also thank Rob Battalio, Tom Cosimano, Glen Dowell, Jeff Harris, Brian Hatch, George Korniotis, Alok Kumar, Paul Laux, Marc Lipson, Lin Peng, Natalia Piqueira, Scott Schaefer, Paul Schultz, Kumar Venkataraman, Wei Xiong, participants at the 2006 Western Finance Association meetings, and seminar participants at the University of Delaware, the University of Kansas, the University of Kentucky, the University of New Mexico, the University of Notre Dame, Texas Tech University, the University of Utah, and Villanova University for helpful comments. Coughenour gratefully acknowledges support through a University of Delaware GUR grant. Any errors are the responsibility of the authors.


While limited attention has been analyzed in a variety of economic and psychological settings, its impact on financial markets is not well understood. In this paper, we examine individual NYSE specialist portfolios and test whether liquidity provision is affected as specialists allocate their attention across stocks. Our results indicate that specialists allocate effort toward their most active stocks during periods of increased activity, resulting in less frequent price improvement and increased transaction costs for their remaining assigned stocks. Thus, the allocation of effort due to limited attention has a significant impact on liquidity provision in securities markets.