Local investor attention and stock returns

Abstract

In this thesis, we analyze the effect of local investor attention on stock returns. The study is carried out on a sample of 653 S&P 500 stocks in the period 2004-2016. Specifically, the paper constructs a variable that each month measures abnormal increases in the investor attention a stock receives by local investors, using Google Search Volume Index data filtered by U.S. state and the category “Investing”. Furthermore, the paper constructs variables that in each month measure the difference in the attention a stock receives by local investors relative to nonlocal investors. We find that firms that attract an unusual amount of attention by local investors experience significant future price reversals. Similarly, we also find that firms receiving considerably higher attention by local investors than nonlocal investors experience monotonic declines in future returns. Finally, we propose a new benchmark state to empirically test theories of local bias, namely the Google Top State. The Top State is the state that according to Google Trends exhibits the highest local interest in a particular firm over our designated time series. For the majority of stocks in our sample, we find that the Top State does not equal the headquarter state, which has been traditionally used to explore theories of local bias. We provide strong empirical evidence in favor of the Top State as a unique and superior testing ground for empirical studies on local bias. Moreover, we find that the attention allocation behavior of investors residing in a firm’s headquarter state exhibits no predictive power for future returns.