capitalization stocks than for large stocks. Some researchers have suggested that these
phenomena may be caused by the psychologically motivated trading behavior of
individual investors. We find, however, that attention-driven buying by individuals is
as strong for large-capitalization stocks as for small stocks. It may be that, while the
impact of individual investor trading differs for large and small stocks, the psychological
biases motivating trading are the same.^18
7.4.6 Earnings and dividend announcements
To test the robustness of our results, we calculate buy–sell imbalances for abnormal
volume partitions, return partitions, and news and no-news for earnings announcement
days, dividend announcement days, and other days. Earnings announcement days span
dayt1totþ2, where daytis the earnings announcement day (per Compustat).
Dividend announcement days span dayt1totþ2, where daytis the dividend
announcement day (per CRSP). We include all dividend announcements regardless
of type. As seen in Figure 7.3, for volume, return, and news sorts, the buy–sell imbalance
results are qualitatively similar across the three partitions.^19
7.5 Short-sale constraints
We argue that because individual investors hold small portfolios and don’t sell short,
attention is more important when choosing stocks to buy (from a huge set of choices)
than when choosing stocks to sell (from a small set). Short-sale constraints could
contribute to our empirical findings through a somewhat different mechanism. An
attention-grabbing event may increase the heterogeneity of investor beliefs about a firm.
Individual investors who become bullish are able to buy the stock, but those who
become bearish can sell it only if they already own it or are willing to sell short.
Institutional investors can both buy and sell. Thus, on average, bullish individuals
and institutions buy attention-grabbing stocks while bearish institutions, but not indi-
viduals, sell. Attention-grabbing events are therefore associated with net buying by
individuals, not because individuals are buying what catches their attention, but because
they can’t sell what catches their attention; attention-grabbing events increase the
heterogeneity of beliefs, while limited portfolios and short-sale constraints restrict
would-be sellers.
We believe that increased heterogeneity of beliefs combined with selling constraints
may contribute to net buying by individuals around attention-grabbing events.
However, even when individuals have the option both to buy or to sell a stock (i.e.,
when they already own the stock) attention will matter more for buying. If short-sale
constraints alone mattered and attention did not otherwise differentially affect buying
and selling, we would expect attention-grabbing events to exert a similar influence on
both the sales and the purchases of stocks that investors already own. The attention
hypothesis makes a different prediction. The attention hypothesis states that attention is
The effect of attention and news on the buying behavior of individual and institutional investors 197(^18) Institutional buy–sell imbalance for our volume and return sorts is also qualitatively similar across small, medium, and large
firms.
(^19) To save space, results are reported only for the investors most likely to display attention-driven buying—those at the large
discount brokerage. Results for the large retail and small discount brokerages are qualitatively similar and available from the
authors.