Investor Inattention and the Underreaction to Stock Recommendations


  • Roger K. Loh

    1. Roger Loh is an Assistant Professor of Finance at the Lee Kong Chian School of Business at Singapore Management University in Singapore.
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  • I thank Hank Bessembinder, Tarun Chordia, Karl Diether, Rudi Fahlenbrach, Fangjian Fu, David Hirshleifer, Kewei Hou, Ravi Jagannathan, Andrew Karolyi, Mike Lemmon, Sonya Lim, Taylor Nadauld, Carrie Pan, Lin Peng, Lakshmanan Shivakumar, Avanidhar Subrahmanyam, Bhaskaran Swaminathan, Siew Hong Teoh, an anonymous referee, and especially René Stulz for their comments. I am also grateful to seminar participants at Ohio State University, Singapore Management University, and the FMA 2008 meetings in Texas for providing many useful suggestions.


Investors’ reaction to stock recommendations is often incomplete so that there is a predictable postrecommendation drift. I investigate investor inattention as a plausible explanation for this drift by using prior turnover as a proxy for attention. I find that low-attention stocks react less to stock recommendations than high-attention stocks around the three-day event window. Subsequently, the recommendation drift of firms with low attention is more than double in magnitude when compared to firms with high attention. Similar conclusions are reached with alternative proxies for attention. The evidence supports investor inattention as a source of the stock recommendation drift.