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International Review of Finance, 2018

DOI: 10.1111/irfi.12180

Negativity Bias in Attention


Allocation: Retail Investors’
Reaction to Stock Returns*
TOMAS REYES
Department of Industrial and Systems Engineering, Pontificia Universidad Católica de
Chile, Santiago, Chile

ABSTRACT

We argue that negative stock market performance attracts more attention


from retail investors than comparable positive performance. Specifically, we
test and confirm the hypothesis that retail investors pay more attention to
negative extreme returns than positive ones. We present a measure of atten-
tion at the aggregate and company-specific levels using Google’s internet
search volume indexes. These measures correlate with, but are different from,
existing proxies of attention. Our empirical results strongly support the posi-
tion that investors display a negativity bias in attention allocation with
respect to extreme stock returns. Across all specifications, lagged negative
extreme returns are stronger predictors of high attention at the individual-
stock and stock market levels than positive ones.

JEL Codes: G02; G14; D19

Accepted: 18 December 2017

I. INTRODUCTION

Psychology research supports the notion that bad is stronger than good. Bau-
meister et al. (2001) argue that in most situations, negative events will produce
larger, more consistent or more intense consequences than positive events of
comparable magnitude. Anecdotally, human beings usually ask to hear the bad
news first, and bad news sells more newspapers. Testing whether attentional
resources are automatically directed away from the current task when inessen-
tial good or bad traits are present, Pratto and John (1991) find that a bad extra-
neous stimulus attracts more attention in an automatic and nonintentional

* The author is grateful to Stefano DellaVigna, Simon Gervais, Isaac Hacamo, Ulrike Malmendier,
Thomas Mertens, Atif Mian, Terrance Odean, Richard Stanton, Adam Szeidl, Paul Tetlock, Hal Var-
ian, and Wei Xiong for helpful comments. He also acknowledges financial support from Fondecyt
Iniciación (No. 11130647), Fondecyt Regular (Nos. 1160048 and 1171894), and Nucleo Milenio
Research Center for Entrepreneurial Strategy under Uncertainty (No. NS130028). Part of the work
was completed while the author was at UC Berkeley.

© 2018 International Review of Finance Ltd. 2018


International Review of Finance

fashion than a good stimulus. And in a study of how long positive or negative
everyday events continue to impact a person’s mood, Sheldon et al. (1996) con-
clude that negative information takes longer to process and contributes more to
the creation of impressions than positive information.
In this paper, we relate the negative–positive attention asymmetry found in
psychology to stock market behavior. We argue that negative stock market per-
formance draws more attention than comparable positive performance. Specifi-
cally, we measure performance using stock returns and test the hypothesis that
retail investors pay more attention to extreme negative returns than to extreme
positive ones.
There is an inherent challenge in directly measuring attention and its alloca-
tion across tasks. We measure attention in the stock market using Google Trends,
which provides a search volume tool that is a powerful proxy of attention for
two reasons. First, it is common for internet users to search for information using
Google, so the results of Google Trends are truly representative of their interest
in a topic. Additionally, since searching for a term on Google obviously requires
paying attention to it, search volume from Google Trends is a better proxy for
attention than alternative instruments used in the literature previously.
The results of Google’s search volume tool are expressed in terms of the
search volume index (SVI). The SVI for a search term is the percentage of
searches for that term throughout 1 week within a geographical region, scaled
by its time-series maximum. Data are available from January 2004 for most
common terms used in Google searches.
Multiple authors have used this data in different areas for modeling and pre-
diction. Ginsberg et al. (2008) employ Google’s indexes to predict flu outbreaks
more efficiently than the Centers for Disease Control and Prevention (CDC).
Choi and Varian (2012) use it to predict sales and tourism. Da et al. (2011) pro-
vide support for the Barber and Odean (2008)‘s price pressure hypothesis using
search data on ticker symbols. Da et al. (2015) use search volume to measure
investor sentiment and show that decreases in search volume are correlated
with price increases, which then reverse in the short term. Campos et al. (2017)
use search volume to model and predict the oil’s VIX, finding that search data
significantly increases the returns of volatility-exposed portfolios.
In this paper, we use three aggregate measures of investor attention to the
stock market based on Google search volume data. The first measure is Atten-
tion to the Stock Market (StockMarket), defined as the sum of the SVI values for
a series of terms such as “stock market” or “best stocks” that investors typically
search when seeking general information about the whole stock market. The
second measure, attention from potential market entrants (OnlineTrading), is
the sum of the SVI values for a series of terms such as “online trading,” “online
brokerage account,” or “best brokerage account,” and captures the tendency of
potential investors to enter the market, that is, to search for information on
opening a brokerage account. Finally, attention from existing investors (Etrade)
is a measure of retail investors who already have a brokerage account and use
Google to access its webpage and log in. It is defined as the sum of the SVI

2 © 2018 International Review of Finance Ltd. 2018


Negativity Bias in Attention Allocation

values for a series of terms such as “etrade” or “ameritrade.” In addition to the


previous three indicators, we implement a measure of attention at the stock
level. Following Da et al. (2011) we use the SVI for the ticker symbols of large
companies in the S&P 500 (e.g., “YHOO” for Yahoo or “WMT” for WalMart).
After constructing these measures, we proceed as follows. First, we study
what drives SVI and how it relates to other indirect proxies for attention. We
find that aggregate US-level SVI measures have positive contemporaneous and
lagged correlations with trading volume and volatility. When we explore the
relationship between lagged returns and attention, we find that the measures
StockMarket and OnlineTrading display the greatest amount of attention to
extreme positive and negative returns. More importantly, lagged negative
extreme returns are stronger predictors of attention in the stock market than
positive extreme returns.
Second, we get SVI data from Google for each US state and construct in-state
versions of our attention variables. We then sort the companies by state using
location codes from Compustat. For each state and week, we construct a portfo-
lio of in-state firms with a high-market capitalization. As with the US-level
results, we find that individual investors show a negativity bias and pay more
attention to negative than positive extreme returns.
Third, we focus on attention to specific stocks and its relationship to individ-
ual stock returns. We use SVI for ticker symbols and stock-level market data to
create a panel with the 100 largest companies in the S&P 500 for which we
have complete data. Here again we find patterns supporting a negativity bias,
even after controlling for other proxies of attention.
Overall, our empirical results strongly support the view that investors display
a negativity bias in attention allocation with respect to extreme stock returns.
Across all specifications, lagged negative extreme returns are stronger predictors
of retail investors’ attention than positive extreme returns. To the best of our
knowledge, this is the first time such a pattern has been documented for US
investors.
We perform several robustness checks. First, we show that the negativity bias
is present in subsamples of companies with both low- and high-institutional
ownership; however, this bias is amplified among companies with a larger frac-
tion of individual investors. This is consistent with previous findings that sup-
port SVI as a proxy for attention from individual investors (Da et al. 2011).
Second, when splitting the sample between groups of stocks with low and high
(lagged) abnormal trading volume, we find that investors pay more attention to
extreme negative returns than positive ones in both subgroups; however, they
display a greater amount of sensitivity to extreme returns that are accompanied
by high volume. Third, we find no evidence to support the possibility that our
results are driven by a negative media bias (that is, more media attention to
negative events than positive ones). Finally, we rule out the possibility that neg-
ative returns are stronger predictors of attention simply because they are more
unusual or because negative and positive returns are not symmetrical events to
stockholders.

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International Review of Finance

In sum, we show that the negativity bias in attention allocation with respect
to extreme stock returns exists above and beyond the effects of asymmetric
media coverage, trading volume, and asymmetric return distributions. There-
fore, we argue that this bias stems primarily from a psychological negative–
positive attention asymmetry.
The negativity bias documented in this paper may provide alternative expla-
nations for the evidence presented by Hirshleifer et al. (2008) and Barber and
Odean (2008). Hirshleifer et al. (2008) show that individuals are net buyers after
negative and positive earning surprises and that the level of net purchases is far
greater after extreme negative earnings surprises than extreme favorable ones.
They claim that these facts provide support for the hypothesis that individual
investors cause post-earnings-announcement drift. Similarly, Barber and Odean
(2008) argue that retail investors are net buyers of attention-grabbing stocks
and that average buy–sell imbalances are greater after negative return days than
positive ones. Possible explanations provided by the authors for this asymmetry
are Shefrin and Statman (1985)‘s disposition effect1 and the execution of limit
orders; however, due to the unavailability of data, no further tests were per-
formed to ascertain the cause. In the presence of a negativity bias in attention
allocation, negative stock market performance will attract more attention than
comparable positive performance. Since high attention is linked to net buying,
this asymmetry could partially explain why the levels of net purchases or buy–
sell imbalances are higher after extreme unfavorable earnings or negative
returns than after extreme favorable earnings or positive returns.
The remainder of this paper is organized as follows. Section II describes the
data sources, the determination of the search terms and the specification of the
attention variables based on Google SVIs. Section III compares our attention
measures to alternative proxies. Section IV relates US-, state- and company-level
measures of attention to extreme returns. Section V checks the robustness of
the results. Finally, Section VI presents our conclusions.

II. DATA AND SAMPLE CONSTRUCTION

When internet users visit the Google website,2 they begin by entering a search
term. Examples of the most commonly used search terms for any date are avail-
able at Google Hot Searches.3 Each day, Google tracks the amount of searches
for every term and their geographical origin. This time-series search volume
data is formally called SVI.
Google provides SVI data for individual search terms and queries (groups of
at most five terms) through a product called Google Trends. Results can be fil-
tered by country, city, state, or county, going back to 2004. The data is propor-
tional to the number of searches performed for a particular term within a

1 The preference for selling winners and holding losers.


2 http://www.google.com
3 http://www.google.com/trends/hottrends

4 © 2018 International Review of Finance Ltd. 2018


Negativity Bias in Attention Allocation

geographical region during a specific day or week. Formally, SVI is defined as


follows:

j j
SVT r , t SVT r , t
j
SVI r , t = = n o ð1Þ
TSV t × MSV r , t TSV t × maxfq, ig SVT ri , q =TSV q

j
where SVT r , t is the search volume for term j in period t within region r, TSVt is
the total search volume in Google (i.e., for all terms combined) at period t, and
MSVr,t is the maximum among all the SVT-to-TSV ratios for the terms in the
query and within the Google data availability sample period.
The search volume is divided by TSVt to eliminate any trends that could be
the result of a change in the number of Google users, and also by MSVr,t to scale
the time series and avoid revealing the raw search numbers. The SVI for a
search term is therefore, as previously mentioned, proportional to the percent-
age of searches for that term during a particular period of time and within a
geographical region.
In this paper we use three aggregate measures of investor attention to the
stock market based on Google search volume data: StockMarket, OnlineTrading,
and Etrade.

A. Attention to the stock market (StockMarket)


Our proxy for attention to the whole stock market is constructed from the
search volume for the list of terms in the first column of Table 1. The term from
this list that has the highest search volume is “stock market,” hence we will
refer to this first measure of attention as StockMarket. To arrive at the list of
terms in the first column of Table 1 we start with the following initial set of
search terms:
’’ 
stock market ’’ , ’’ stock prices’’ , ’’ best stocks’’ ð2Þ

Upon searching for these terms, we obtain related terms recommended by


Google,4 which are similar terms used by other users during searches for the
original term. Since the related searches feature is a reliable way of learning
how users search, it helps make the final version of the list more objective and
independent of the initial terms in the list (2).
The accumulation of these related search terms results in a list of 60 terms
from which we discard those that are either company names (users may be
searching them for many unrelated reasons), very general (e.g., “fox news” or
“cnn”) or simply unrelated (e.g., “online auctions” or “housing market”). We

4 This is a standard feature provided by Google, available on the results page.

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Table 1 List of terms


(1) (2) (3)
StockMarket OnlineTrading Etrade
Best stocks Best online trading Ameritrade
Dow jones Discount broker Charles schwab
Good stocks Discount brokers Etrade
Google finance Online broker Scottrade
Hot stocks Online brokerage Sharebuilder
Market watch Online brokers
Nasdaq Online investing
Stock market Online stock trading
Stock market news Online trading
Stock market today Stock broker
Stock prices
Stock quotes
Yahoo finance
Notes: Column 1 contains the list of terms used to proxy for attention to the whole stock market
(StockMarket). This list is drawn up by starting with a small set of terms (“stock market,” “stock
prices,” and “best stocks”), each of which is googled to obtain the related searches recommended
by the search engine. Terms that are either company names (users may be searching them for
many unrelated reasons), very general (e.g., “online investment”) or simply unrelated
(e.g., “online auctions”) are then discarded. With the remaining terms the process of getting
related terms and dropping irrelevant ones is iterated a final time to get the definitive list pre-
sented here. Columns 2 and 3 are the similarly derived lists of terms used to capture potential
investors’ interest in entering the market (OnlineTrading) and the tendency of existing investors
to check their account or trade (Etrade) respectively.

repeat the process of retrieving related terms and dropping irrelevant ones with
this interim list to get the definitive list shown in column 1 of Table 1.
We then enter these terms manually into Google Trends5 to find the one
with the largest SVI, which will be the initial term in each of the queries we use
to download data. This is done to make sure Google scales each time series
using the same value for MSVr,t in equation (1) so they can be easily aggregated.
For each query, we collect weekly data for the United States and each of the
lower 48 states using a web crawling program that inputs each term and geo-
graphical region into Google Trends and downloads the resulting SVI data into
a CSV file.
The SVI for “stock quotes,” “stock prices,” and “best stocks,” three of the
terms in the first column of Table 1, are shown in the top panel of Figure 1. As
can be seen, their search volumes are positively correlated. All three display a
spike in late September 2008 just after Lehman Brothers declared bankruptcy,
suggesting that negative events draw much attention. The SVI for the first two
terms have decreased over time (probably due to the growing popularity of
websites such as Yahoo or Google Finance where similar information can be
found) and show some annual seasonality.

5 In queries consisting of groups of five.

6 © 2018 International Review of Finance Ltd. 2018


Negativity Bias in Attention Allocation

Unfortunately, Google does not return a valid SVI for some terms in some
geographical regions. If a term is rarely searched for in a given state, Google
Trends may return only zeros or simply drop the term from its output. Thus,
after attempting to download all the data, we only obtained 91,471 term-week-
region data points, which is 39% of the maximum attainable. Finally, since we
want a unique measure of retail investors’ attention to the stock market for
each region, we aggregate the terms as follows:
X j
StockMarket r , t = SVI r , t 8r,t ð3Þ
j2J

where J represents all the search terms in column 1 of Table 1.


The top panel in Figure 2 shows data availability for the measure StockMarket
across the lower 48 states. No data is returned by Google for states in white
(i.e., DE, FL, KS, LA, MT, ND, SD, VT, WV, and WY); for all others, the percent-
age of weeks with available data is indicated in parentheses. Finally, states
shown in darker colors have more data.

B. Attention from potential market entrants (OnlineTrading)


Our second measure of attention captures the tendency of potential investors
to enter the market. In other words, we aim to identify investors who are new
to the stock market and are seeking information on opening a brokerage
account. This indicator is calculated based on the search terms in the second
column of Table 1. Since the highest-volume search term on the list is “online
trading,” we refer to this second measure of attention simply as OnlineTrading.
To obtain the final list presented in the table, we repeat the procedure described
above for the measure StockMarket, starting with the following set of terms:
’’ 
online broker ’’ ,’’ online trading ’’ ,’’ stock broker ’’

The bottom panel in Figure 1 shows the SVI over time for three of the final
terms, namely, “best online trading,” “online broker,” and “online stock trading.”
As in the top panel, search volumes are for the United States as a whole and are
positively correlated. However, the SVI reflecting attention from potential market
entrants, which compose the measure OnlineTrading, are more volatile, show no
seasonality and are less frequently searched. The downloaded data yielded a total
of 31,011 term-week-region points, only 17% of the maximum possible.
We now aggregate the SVI across terms to compute a combined measure of
attention as in equation (3) but with J now representing the set of terms in col-
umn 2 of Table 1. The bottom panel in Figure 2 corroborates that the data for
OnlineTrading (across states) are scarcer than the data for StockMarket and are
available only for 14 states.6

6 CA, FL, GA, IL, MA, MI, NJ, NY, NC, OH, PA, TX, VA, and WA.

© 2018 International Review of Finance Ltd. 2018 7


International Review of Finance

1
stock quotes
0.9 stock prices
best stocks
0.8

0.7
Seach Volume Index

0.6

0.5

0.4

0.3

0.2

0.1

0
2005 2006 2007 2008 2009 2010
Year

1
best online trading
0.9 online broker
online stock trading
0.8

0.7
Search Volume Index

0.6

0.5

0.4

0.3

0.2

0.1

0
2005 2006 2007 2008 2009 2010 2011
Year

8 © 2018 International Review of Finance Ltd. 2018


Negativity Bias in Attention Allocation

i. New accounts opened


The data we obtain from Google SVI are validated by brokerage data from TD
Ameritrade, a publicly traded online brokerage company that has been required
to report the number of new accounts opened each quarter since 2007. These
numbers are reported in TD Ameritrade’s 10-K or 10-Q filings with the US Secu-
rities and Exchange Commission. Figure 3 plots these quarterly figures together
with the values for OnlineTrading. The latter are computed quarterly for the
United States and rescaled to range up to a maximum value of 1. As the graph
shows, OnlineTrading, the SVI that captures attention from potential market
entrants is positively correlated to the number of accounts opened with TD
Ameritrade. The plot thus supports the validity of our measure.

C. Attention from existing investors (Etrade)


Our third measure, Etrade, is associated with existing investors who already
own a brokerage account and use Google to access to it. The search terms for
this measure are shown in column 3 of Table 1. Each term in the list relates to
one of the more popular online brokers in 2010. Some of them may be searched
in Google in multiple ways. For example, e*trade may be entered as “etrade,”
“e*trade,” “e-trade,” or “e trade,” We manually type each of these alternatives
into Google Trends and keep the most popular one (i.e., the one with the high-
est search volume). We aggregate the SVI across terms as in equation (3) and
present the available data across states in the top panel of Figure 4.

D. Stock level attention


Our analysis also requires measures of attention for individual company stocks.
Following Da et al. (2011) we use the SVI for ticker symbols. The search volume
for a company name may be a problematic indicator since the motive for such
a search may be totally unrelated to investing. A firm’s ticker, on the other
hand, will generate results more precisely focused on persons seeking financial
information about the company.
Given that investors are more aware of the existence of big companies than
small ones, we begin by analyzing the tickers of the companies included in the
S&P 500 index. We manually go through each ticker in search of ambiguities
and drop 88 ticker symbols with generic meanings, such as “A,” “ALL,” “BIG,”
and “CA.” For the remaining 412 companies, we compute market capitalization
(number of shares multiplied by price per share) and retain the 100 largest for
our sample. We then download the SVI data for each of these firms.

Figure 1 SVI examples.


Notes: The top panel shows the SVI for “stock quotes,” “stock prices,” and “best stocks.”
The bottom panel shows the SVI for “best online trading,” “online broker,” and “online
stock trading.” Search volumes for the terms in each panel are positively correlated. All
display a spike in late September 2008, just after Lehman Brothers declared bankruptcy.
The SVI for the largest two terms in each panel have decreased over time, probably due to
the growing popularity of websites such as Yahoo or Google Finance, where similar
information can be found. [Color figure can be viewed at wileyonlinelibrary.com]

© 2018 International Review of Finance Ltd. 2018 9


International Review of Finance

WA(100)
ME(60)
MT ND NH(75)
MN(74) VT
OR(60) ID(61) MI(100)
WI(62) MA(100)
NY(100)
RI(61)
CT(59)
SD
WY PA(100)
IA(75) NJ(100)
NE(76) DE
OH(100) MD(74)
NV(82) UT(77) IL(100)
IN(60) WV
CO(73) VA(100)
CA(100) KS MO(72) KY(45)
NC(92)
TN(51)
AZ(75) OK(79) AR(61) SC(77)
NM(61)
GA(100)
MS(60)AL(75)
LA
TX(100)
100%=354 FL

WA(55)
ME
MT ND NH
MN VT
OR ID MI(55)
WI MA(60)
NY(100)CTRI
SD
WY PA(71)
IA NJ(74)
NE OH(62) MDDE
NV UT IL(89) IN WV
CO VA(62)
CA(100) KS MO KY
NC(62)
TN
AZ OK AR SC
NM
GA(59)
MS AL

LA
TX(93)
100%=354 FL(81)

Figure 2 Geographical distribution of data.


Notes: The top panel shows data availability for terms related to the measure
StockMarket across the lower 48 states of the United States. Google returns no data for
the states in white (DE, FL, KS, LA, MT, ND, SD, VT, WV, and WY); for all others, the
percentage of weeks with available data is indicated in parentheses. States with darker
colors have more data. Similarly, the bottom panel shows data availability for terms
related to OnlineTrading. In this case Google returns no data for 14 of the 48 states.
[Color figure can be viewed at wileyonlinelibrary.com]

10 © 2018 International Review of Finance Ltd. 2018


Negativity Bias in Attention Allocation

5
x 10
1 2.5
Attention from Potential Market
Entrants
New Accounts (TD Ameritrade)

Number of New Accounts


Seach Volume Index

0.8 2

0.6 1.5

0.4 1
2007Q1 2008Q1 2009Q1 2010Q1
Year
Figure 3
Attention from potential market entrants and real number of
accounts opened.
Notes: The figure presents how quarterly new accounts opened in TD Ameritrade
(as reported on SEC Forms 10-K and 10-Q after 2007) relate to (quarterly) aggregated
SVI for OnlineTrading. Attention from potential market entrants behaves similarly to
the real number of accounts opened in TD Ameritrade, providing support for the
validity of our measure. [Color figure can be viewed at wileyonlinelibrary.com]

III. SVI, TRADING VOLUME, AND VOLATILITY

In this section, we study how SVI relates to indirect proxies for attention. A key
variable for our analysis is what we refer to as abnormal attention to the stock
market (AStockMarket), defined as follows:
0 1
B StockMarket r , t C
AStockMarket r , t = log@1 + X A: ð4Þ
1 8
StockMarket r, t − q
8 q=1

The mean of StockMarket over the 8 weeks preceding a given moment deter-
mines a reference level of attention for that moment.7 Thus, AStockMarket mea-
sures changes in interest with respect to recent normal levels, with a high (low)

7 Since the AStockMarket measure would be undefined when the mean of StockMarket over the
prior 8 weeks is zero, we add 0.01 to the mean to avoid losing those observations. The same
applies to other Abnormal variables throughout the paper.

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International Review of Finance

WA(100)
ME
MT ND NH
MN(87) VT
OR(95) ID MI(100)
WI(80) MA(100)
NY(100)
RI(51)
CT(85)
SD
WY PA(100)
IA(58) NJ(100)
NE DE
OH(87) MD(94)
NV UT(61) IL(100)
IN(73) WV
CO(91) VA(100)
CA(100) KS(71) MO KY
NC(83)
TN(77)
AZ(100) OK AR SC(71)
NM
GA(89)
MS AL

LA(68)
TX
100%=354 FL

WA(12)
ME(1)
MT(1) ND(1) NH(3)
MN(17) VT(1)
OR(6) ID(1) MI(11)
WI(7) MA(40)
NY(71) RI(2)
CT(15)
SD(1)
WY(1) PA(29)
IA(4) NJ(30)
NE(3) DE(11)
OH(20) MD(12)
NV(5) UT(4) IL(39)IN(9) WV(1)
CO(14) VA(16)
CA(100) KS(4) MO(10) KY(4)
NC(12)
TN(8)
AZ(8) OK(5) AR(3) SC(4)
NM(1)
GA(17)
MS(2) AL(5)
LA(4)
TX(51)
100%=817 FL(26)

Figure 4 Geographical distribution of data.


Notes: The top panel shows data availability for terms related to the measure Etrade across the
lower 48 states of the US Google returns no data for the states in white; for all others, the
percentage of weeks with available data is indicated in parentheses. States with darker colors
have more data. The bottom panel shows the number of companies headquartered in each
state. The source of the company location codes is Compustat. Numbers in parentheses are
relative to the national maximum number of companies, which is 817 in CA (followed by
NY, with 71% × 817 = 580). [Color figure can be viewed at wileyonlinelibrary.com]
12 © 2018 International Review of Finance Ltd. 2018
Negativity Bias in Attention Allocation

value indicating a relative increase (decrease) in attention. Measures for abnor-


mal attention from potential market entrants (AOnlineTrading) and abnormal
attention from existing investors (AEtrade) are defined analogously.
We investigate how these aggregate proxies for attention are related to other
observable proxies that are likely to be linked with attention-grabbing events. For
example, Barber and Odean (2008), Gervais et al. (2001), and Hou et al. (2009)
argue that abnormally heavy volume is associated with information releases or
large price moves that attract attention. Therefore, our first alternative proxy for
attention is the abnormal trading volume (AVlm) for a portfolio p, defined as:
0 1
B Vlmp, t C
AVlmp, t = log@1 + X A: ð5Þ
1 8
Vlmp, t − q
8 q=1

De Long et al. (1990) claim that noise trading following periods of extreme
sentiment can create future volatility. Baker and Wurgler (2007) use the CBOE
market volatility index (VIX), a popular measure of the implied volatility of S&P
500 index options, to proxy for aggregate market sentiment. Consequently, we
will also use the abnormal VIX (AVIX) as an alternative proxy for attention:
0 1
B AVIXt C
AVIXt = log@1 + X A
1 8
AVIX t −q
8 q=1

The contemporaneous correlations among these five abnormal measures


(AStockMarket, AOnlineTrading, AEtrade, AVlm, and AVIX) are shown in Table 2.
The SVI-based measures of attention are computed using search volumes at the
US level and AVlm is calculated from equation (5), where Vlm is trading volume
for a value-weighted portfolio formed by all stocks in CRSP.
As can be seen, all correlations are positive and range from 19.3% to 78.2%.
Our three measures of abnormal attention are highly correlated among them-
selves, with levels ranging from 64.3% to 78.2%. This is no surprise, since all
three measures are influenced by aggregate market events. The two measures of
attention based on volume and volatility are imperfect given that there are
many changes in these factors that may be attributable to other fundamental
market information. Nevertheless, the correlation of AStockMarket with AVIX is
54.2%, clearly a high value that confirms the validity of AStockMarket as a mea-
sure of attention. As for AStockMarket and AVlm, even though the correlation
between them is smaller, it is still a substantial 44.5%.
The correlation of AOnlineTrading with AVlm and AVIX is 26.6% and 34.3%,
respectively. This is unsurprising, since we do not expect potential investors’
interest in the stock market (proxied by AOnlineTrading), to match overall atten-
tion to the stock market (proxied by AStockMarket).

© 2018 International Review of Finance Ltd. 2018 13


International Review of Finance

Table 2 Correlations
AStockMarkett AOnlineTradingt AEtradet AVlmt AVIXt
AStockMarkett 1
AOnlineTradingt 0.675*** 1
AEtradet 0.643*** 0.782*** 1
AVlmt 0.445*** 0.266*** 0.302*** 1
AVIXt 0.542*** 0.343*** 0.193*** 0.304*** 1
Notes: AStockMarket is Abnormal Attention to the Stock Market and measures general interest in
the stock market, stock prices and investment opportunities. AOnlineTrading is abnormal atten-
tion from potential market entrants and proxies for individuals who are looking for information
on opening a brokerage account. AEtrade is abnormal attention from existing investors and con-
cerns retail investors who already own a brokerage account and use Google to get to its website.
All three measures are computed using weekly search volume from Google at the aggregate US
level. AVlm is Abnormal Trading Volume. Data on trading volume is for a value-weighted portfo-
lio consisting of all stocks in CRSP. AVIX is abnormal VIX, the CBOE market volatility index that
measures the implied volatility of S&P 500 index options. The sample period is from January
2004 through December 2010. ***, **, and * represent significance at the 1%, 5% and 10% levels.

As for our measure of attention from existing investors, AEtrade, not surpris-
ingly it exhibits a smaller correlation with AVIX and also a relatively low corre-
lation with AVlm. One obvious explanation for this is that, unlike the other
two measures, when people use the search terms related to AEtrade they may
not be seeking information but merely using Google to help them log in to the
brokerage websites (that some of them may have bookmarked in their web
browsers).

IV. SVI AND STOCK RETURNS

This section contains the core of our analysis, in which we relate our abnormal
attention measures to stock returns. More specifically, we test the extent to
which the attention measures defined above respond to stock returns of differ-
ing magnitudes. This is done using three different but complementary regres-
sion specifications set out in the following subsections. In the first
specification, we explore the relationship between lagged returns and stock
market attention at the US level; in the second, we consider the same relation-
ship at the state level; in the third, we examine whether similar patterns are
present at the company level.

A. US level
For the US-level specification, we begin by sorting the returns into quintiles
q (i.e., 20% partitions) and then construct five level variables as follows:

q
Ii Ret t = 1fRet t 2 qi g, 8i 2 f1,…,5g ð6Þ

To these, we add five sensitivity variables:

14 © 2018 International Review of Finance Ltd. 2018


Negativity Bias in Attention Allocation

q q
Pi Ret t = Ret t × Ii Ret t , 8i 2 f1,…,5g ð7Þ

q
Thus, P1 Ret t is equal to Rett if Rett is among the lowest 20% of the returns
during the sample period, and zero otherwise. This implies that

X
5
q
Pi Ret t = Ret t
i=1

q q
and by construction, P1 Ret t will contain extreme negative returns and P5 Ret t
extreme positive returns.
To test our main hypothesis we run the following time-series regression
specification:

X
5
0
AAttentiont = α + βi f ði,t Þ + QFE δ + εt ð8Þ
i=1

AAttention is a stand-in representing the three abnormal attention measures


that will be used in turn as the dependent variable: AStockMarket, AOnlineTrad-
q q
ing, and AEtrade. f(i, t) is either Ii Ret t or Pi Ret t , Rett are returns from a value-
weighted portfolio of high-market capitalization stocks (highest quartile) from
CRSP, and QFE are quarter fixed effects to control for major events that have
occurred during the sample period.
q
We refer to the above specification as the level regression when f ði, t Þ = Ii Ret t
and α equals zero (since including an intercept together with the level variables,
q
Ii Ret t , would generate multicollinearity issues)., We refer to the same specifica-
q
tion as the sensitivity regression when f ði,t Þ = Pi Ret t . In this latter case, to avoid
potential biases in the estimated coefficients caused by imposing the same
q
intercept α on all sensitivity variables Pi Ret t , we demean each of these variables
within their own quintile groups. This allows us to directly interpret the esti-
mated coefficients on the demeaned variables as pure sensitivity effects.8 The
level regression will be used to test the change in attention when returns are
extremely positive or negative, whereas the sensitivity regression will be used to
test it for a change in returns when returns are positive or negative.
q
8 An alternative way to perform the analysis would be to include both sets of variables, Ii Ret t
q
and nondemeaned Pi Ret t , in a single regression specification. However, untabulated results
q q
show that correlations between pairs of Ii Ret t and nondemeaned Pi Ret t variables range from
67.5% to 97% (in absolute value), creating severe multicollinearity issues that are confirmed
by VIF values greater than 30 for many of these variables when including them in the same
q
regression model. Additionally, in this joint specification, the coefficients on the Ii Ret t vari-
ables could not be directly interpreted as level effects. In contrast, by demeaning the sensitiv-
ity variables within each quintile group, we avoid the multicollinearity issues and the
potential bias in the estimated coefficients, and additionally benefit from estimated coeffi-
cients that can be directly interpretaed as sensitivity effects.

© 2018 International Review of Finance Ltd. 2018 15


International Review of Finance

Table 3 Aggregate measures of attention and returns


(1) (2) (3)
AStockMarkett AOnlineTradingt AEtradet
Panel (a)
q
I1 Ret t −1 3.131*** (45.59) 4.706*** (68.95) 5.459*** (83.63)
q
I2 Ret t −1 2.974*** (73.14) 4.557*** (87.91) 5.444*** (114.29)
q
I3 Ret t −1 2.942*** (112.40) 4.599*** (165.55) 5.444*** (182.92)
q
I4 Ret t −1 2.974*** (112.65) 4.656*** (171.91) 5.537*** (182.42)
q
I5 Ret t −1 2.952*** (73.14) 4.630*** (96.75) 5.540*** (115.00)
QFE Yes Yes Yes
Adj R-squared 0.122 0.0719 0.164
Observations 345 345 345
Diff. coeffs. 0.179 0.0755 −0.0815
Diff. p-value 0.00741 0.139 0.104
Panel (b)
q
P1 Ret t −1 −0.341*** (−3.49) −0.394*** (−2.95) −0.276*** (−2.71)
q
P2 Ret t −1 −0.00178 (−0.04) −0.0413 (−1.04) 0.0153 (0.38)
q
P3 Ret t −1 0.0731 (1.06) 0.0602 (1.11) 0.0341 (0.57)
q
P4 Ret t −1 −0.0145 (−0.50) −0.0207 (−0.51) 0.00146 (0.03)
q
P5 Ret t −1 −0.0124 (−0.43) −0.0313 (−0.60) −0.00956 (−0.18)
QFE Yes Yes Yes
Adj R-squared 0.205 0.205 0.217
Observations 345 345 345
Diff. coeffs. 0.329 0.362 0.267
Diff. p-value 0.000950 0.00224 0.00862
P 0
Notes: The table reports estimates of β in the regression Attentiont = α + 5i = 1 βi f ði,t − 1Þ + QFE δ + εt .
AAttentiont is the measure AStockMarkett, AOnlineTradingt and AEtradet, in columns 1, 2 and
p q q
3, respectively. f(i, t) is Ii Ret t and α is zero in panel (a), and f(i, t) is Pi Ret t in panel (b). Ii Ret t is
q q
an indicator function for returns sorted into quintile i. Pi Ret t is defined as Ret t × Ii Ret t , and it is
demeaned within each quintile. t represents weeks and Rett are returns of a value-weighted port-
folio of high-market capitalization (highest quartile) firms. QFE are quarter dummies. Standard
errors are computed using Newey and West (1987) with three lags to address autocorrelation and
heteroskedasticity. Adjusted R-squared values are from OLS. The variables are normalized by
dividing them by their standard deviation. Diff. coeffs. and p-value denote the differences
between the lowest- and highest-quintile coefficients and their p-values, respectively. The t-test
results are in parentheses. ***, **, and * represent significance at the 1%, 5% and 10% levels.

Standard errors are computed using Newey and West (1987) with three
lags to address autocorrelation and heteroskedasticity. The variables are nor-
malized by dividing them by their standard deviation, so that the coeffi-
cient represents the change in the dependent variable for a single standard
deviation change in the predictor variable. The t-test results are in
parentheses.
The results of the level regressions are presented in panel (a) of Table 3 and
those of the sensitivity regressions in panel (b) of the same table. In both

16 © 2018 International Review of Finance Ltd. 2018


Negativity Bias in Attention Allocation

panels, columns 1, 2, and 3 show the results when AAttention is the measure
AStockMarket, AOnlineTrading, or AEtrade, respectively.9
In the level regression in panel (a) of Table 3, all coefficients are positive and
significant at the 1% level, reflecting the fact that market events grab investors’
attention. The coefficients for the lowest quintile are, in general, higher than
those for the other quintiles, except for AEtrade. When AStockMarket is the mea-
sure of investor attention, in column 1, the lowest-quintile regression coeffi-
cient is 3.131 and the highest is 2.952. This is a 6.1% difference in abnormal
attention to the stock market for the same variation in the two extremes of the
return distribution (in terms of standard deviation).
Column 2, representing attention from potential investors, shows a smaller
difference between the coefficients of the lowest and highest quintiles, suggest-
ing that AOnlineTrading has a smaller negativity bias. For AEtrade, the relation-
ship between the coefficients of the lowest- and highest-quintiles flips; this is
consistent with the ostrich effect documented by Karlsson et al. (2009), accord-
ing to which existing investors monitor their brokerage accounts more fre-
quently after positive news than after negative news, a factor that should
counterbalance any negativity bias. A caveat on this point, however, is that our
Etrade measure may be a noisy proxy compared to Karlsson et al. (2009)‘s
measure.
Wald tests performed on our results for AStockMarket reject the hypothesis
that the coefficient associated with the lowest quintile is equal to or lower than
the one associated with the highest quintile (p-value of 0.07%.) For AOnline-
Trading, the results are similar, but marginally significant, with a p-value of
13.9%. For AEtrade, however, the same hypothesis cannot be rejected, which is
again consistent with the ostrich effect documented by Karlsson et al. (2009).10
As for the sensitivity regression presented in panel (b) of Table 3, the first
and second columns show that AStockMarket and AOnlineTrading display the
greatest amount of sensitivity to a change in returns when the latter are at an
extreme level. Negative extreme returns have negative coefficients, so changes
in returns towards the negative extreme grab investors’ attention more
intensely. In column 1, when attention is proxied by AStockMarket, the coeffi-
cient for the lowest quintile is −0.341, which is significantly different from zero;
the coefficient for the highest quintile is not statistically different from zero.
Therefore, our results confirm that a change in lagged negative aggregate
returns has a stronger and more statistically significant impact on attention to
the stock market than a change in positive returns.

9 We obtain similar results when Rett are returns from a value-weighted portfolio of all stocks
in CRSP.
10 Similar untabulated results are obtained when using deciles, ventiles or centiles rather than
quintiles in the regression specified by (8). For AStockMarket, Wald tests performed on dec-
iles, ventiles and centiles also reject the hypothesis that the coefficient of the most negative
group is equal to or lower than that of the most positive group; the p-values are 1.7%, 1.0%,
and 2.0%, respectively. For AOnlineTrading, the results are similar, with p-values of 7.2%,
2.3%, and 5.7% for deciles, ventiles and centiles, respectively.

© 2018 International Review of Finance Ltd. 2018 17


International Review of Finance

The same pattern holds when AOnlineTrading is the measure of attention; in


this specification, the coefficient for the lowest quintile is −0.394, which is sig-
nificantly different from zero; the coefficient for the highest quintile is not sta-
tistically different from zero. In column 3, AEtrade shows a similar pattern, also
exhibiting a significant reaction to extreme negative returns; however, the dif-
ference between coefficients associated with the lowest and highest quintiles is
smaller than for the previous two measures of attention.
Wald tests performed on these results for AStockMarket, AOnlineTrading, and
AEtrade reject the hypothesis that the coefficient associated with the lowest
quintile (in absolute value) is equal to or lower than that associated with the
highest quintile; the p-values are <0.095%, 0.22%, and 0.86% for columns 1, 2,
and 3, respectively.11

B. State level
We now specify the state-level regressions, which are similar to the US-level time
series specification (8) but use panel data. AStockMarket, AOnlineTrading, and
AEtrade are constructed as defined in equation (4) using state-level SVI data.
We begin by sorting companies by state, using company location codes from
Compustat to identify the locations of each firm’s headquarters. The geographi-
cal distribution of the companies by state is shown in the bottom panel of
Figure 4. The numbers in parentheses are the average number of companies
headquartered in each state relative to the national maximum, which is 817 in
California (CA). For example, New York (NY) has 71% × 817 = 580 and Texas
(TX) has 51% × 817 = 417. The states with darker colors have more companies.
We next construct, for each state and week, a portfolio of high-market capitali-
zation (highest quartile) in-state companies. In general, the number of compa-
nies in each such portfolio differs from state to state. Since the purpose of the
portfolios is to reduce noise, states with very few firms (i.e., less than 20) are dis-
carded. We sort the returns on these portfolios into quintiles as in equation (7).
The state-level regressions are specified in (9) and (10) below and the corre-
sponding results are given in panels (a) and (b) of Table 4, respectively. The first
column in panel (a) of Table 4 reports estimates of βi in:

X
5
q 0 0 0
AStockMarket s, t = βi Ii Ret in
s, t −1 + Controls γ + SFE δ1 + QFE δ2 + εs, t ð9Þ
i=1

11 Similar untabulated results are obtained when using deciles, ventiles and centiles instead of
quintiles. For AStockMarket, Wald tests performed on deciles, ventiles and centiles reject the
hypothesis that the coefficient associated with the most negative group is equal to or lower
than that of the most positive group; the p-values are <0.1%, < 0.1%, and 0.5%, respectively.
For AOnlineTrading and AEtrade, the results are similar, with p-values <0.1% for deciles,
ventiles and centiles.

18 © 2018 International Review of Finance Ltd. 2018


Negativity Bias in Attention Allocation

Table 4 State-level measures of attention and returns


(1) (2) (3)
AStockMarkett AOnlineTradingt AEtradet
Panel (a)
q
I1 Ret in
t −1
2.176*** (11.82) 1.224* (1.82) 2.757*** (10.91)
q
I2 Ret in
t −1
2.036*** (11.33) 1.122 (1.66) 2.730*** (10.92)
q
I3 Ret in
t −1
2.052*** (11.45) 1.161 (1.72) 2.749*** (10.86)
q
I4 Ret in
t −1
2.044*** (11.32) 1.201* (1.78) 2.760*** (10.89)
q
I5 Ret in
t −1
2.043*** (11.33) 1.152 (1.72) 2.781*** (11.20)

Controls Yes Yes Yes


SFE Yes Yes Yes
QFE Yes Yes Yes

Adj R-squared 0.953 0.963 0.975


Observations 8120 3246 7039
Diff. coeffs. 0.133 0.0722 −0.0239
Diff. p-value <0.0001 0.000417 0.0260

Panel (b)
q
P1 Ret in
t −1
−0.193*** (−4.11) −0.183*** (−3.31) −0.146*** (−3.78)
q
P2 Ret in
t −1
−0.0166* (−1.91) −0.00942 (−0.32) 0.000585 (0.05)
q
P3 Ret in
t −1
0.0100 (0.89) 0.0184 (1.32) 0.0136 (1.01)
q
P4 Ret in
t −1
0.0198*** (2.70) −0.0123 (−0.50) −0.0195** (−2.08)
q
P5 Ret in
t −1
0.00150 (0.07) 0.0252 (0.83) −0.0112 (−0.35)

Controls Yes Yes Yes


SFE Yes Yes Yes
QFE Yes Yes Yes

Adj R-squared 0.163 0.0727 0.0944


Observations 8120 3246 7039
Diff. coeffs. 0.192 0.158 0.135
Diff. p-value 0.000563 0.00558 0.00133
P
Notes: The table reports estimates of β in the regression AAttentions, t = α + 5i = 1 βi f ði, s,t −1Þ +
0 0 0
Controls γ + SFE δ1 + QFE δ2 + εs, t . AAttentions,t is either AStockMarkets,t, AOnlineTradings,t or AEtrades,t.
q
These measures are based on search volume data for state s. f(i, s, t) is Ii Ret in s, t and α is zero in
q
panel (a). f(i, s, t) is Pi Ret in
s, t in panel (b) and it is demeaned within each quintile. t represents
weeks and Ret in
s, t is the return on a portfolio of high-market capitalization (highest quartile) com-
panies headquartered in state s. MFE and SFE are month and state fixed effects. State controls are:
(i) Coincident Economic Activity Index; (ii) Leading Index; and (iii) the unemployment rate. In
panel (a) we cluster standard errors by state. In panel (b) we double cluster using the Petersen
(2009) implementation of Campos et al. (2017)‘s procedure. The variables are normalized by
dividing them by their standard deviation. Diff. coeffs. and p-value denote the differences
between the lowest- and highest-quintile coefficients and their p-values. The t-test results are in
parentheses. ***, **, and * represent significance at the 1%, 5% and 10% levels.

© 2018 International Review of Finance Ltd. 2018 19


International Review of Finance

The first column in panel (b) of Table 4 reports the estimates of βi in:

X
5
q 0 0 0
AStockMarket s, t = α + βi Pi Ret in
s, t −1 + Controls γ + SFE δ1 + QFE δ2 + εs, t ð10Þ
i=1

q
where all sensitivity variables, Pi Ret t , are demeaned within their own quintile
groups as in the US-level specification.
Columns 2 and 3 of the two panels show the results of the equivalent regres-
sion specifications using AOnlineTrading and AEtrade as the dependent variables
instead of AStockMarket.
SFE and QFE are state and quarter fixed effects, respectively. Quarter instead of
week dummies are used given that the effect we are trying to capture is not
purely cross-sectional, as shown in the previous section. The state controls,
obtained from the St. Louis Federal Reserve Bank, are the following monthly
variables: (i) the coincident economic activity index, to summarize current eco-
nomic conditions; (ii) the leading index, to predict the 6-month growth rate of
a state’s coincident index; and (iii) the unemployment rate. In the sensitivity
regression we double cluster standard errors by state and week. In the level
regression, since we drop the constant, we cluster standard errors by state.12
As in the US-level regression, columns 1 and 2 of panels (a) and (b) in
Table 4 show that AStockMarket and AOnlineTrading are most sensitive to
extreme returns. In panel (a) the coefficients for the lowest quintile are, in gen-
eral, higher than those for the other quintiles, except for AEtrade.
In panel (b), negative extreme returns have significant and negative coeffi-
cients and positive extreme returns have coefficients not statistically different
from zero. More importantly, lagged extreme negative returns have larger coef-
ficients (in absolute value) than extreme positive returns. AEtrade, in column
3, is again the group that exhibits the least negativity bias in both the level and
sensitivity regressions, as measured by the difference in absolute values between
the coefficients in rows 1 and 5.
For all measures of attention, Wald tests reject the hypothesis that the coeffi-
cient associated with the lowest quintile is equal to or lower than the one asso-
ciated with the most positive extreme, with p-values <5% for all columns in
panel (a), and <1% for all columns in panel (b). However, significance levels for
AEtrade (column 3 in both panels) are lower than those for AStockMarket and
AOnlineTrading. These findings are consistent with our previous US-level results,
which support the existence of a negativity bias in attention allocation and find
that this bias is stronger for the measures ASTockMarket and AOnlineTrading.13

12 Petersen (2009)‘s implementation of Cameron et al. (2012)‘s procedure does not allow to
double cluster without a constant intercept.
13 The results remain similar when using deciles, ventiles, and centiles in the level regressions
and when using deciles and ventiles in the sensitivity regressions, with p-values <1% in all
cases.

20 © 2018 International Review of Finance Ltd. 2018


Negativity Bias in Attention Allocation

C. Company level
In this section, we test whether the negativity bias documented in the previous
sections at the aggregate United States and state levels also exists for specific
stocks. Our sample consists of the 100 largest companies in the S&P 500 index
as measured by market capitalization for which we have complete data. Simi-
larly to the previous abnormal attention measures we define ATicker as:
0 1
B Ticker c, t C
ATicker c, t = log@1 + X A
1 8
Ticker c, t − q
8 q=1

where Tickerc,t is search volume during week t for the ticker symbol associated
with company c and ATickerc,t measures changes in attention with respect to
the normal level.
For each company we also download daily returns, trading volume, price,
and number of shares outstanding from CRSP, and compute their respective
weekly values. Weekly trading volume, Vlm, is defined as the sum of daily trad-
ing volume during the week, and abnormal trading volume, AVlm, is
defined as:
0 1
B V lmc, t C
AV lmc, t = log@1 + X A
1 8
V lm c , t − q
8 q=1

Weekly returns are holding period returns from market close on a given
Friday to market close on the next Friday. Weekly market capitalization, Mcap,
is the price at the end of the week times number of shares outstanding at the
end of the week. Log market capitalization, LMcapc,t, is defined as log(Mcapc,t).
Additionally, we compute the fraction of shares held by institutional investors,
InstOwn, using quarterly data from Thomson Reuters Institutional (13f ) Hold-
ings Database; missing values are filled with zeros.
News coverage is obtained from LexisNexis Academic. Following Drake
et al. (2012), we count the number of news articles, Newsc,t, in the Wall Street
Journal, the New York Times, USA Today, and the Washington Post that mention
firm c during week t. Then, we define an abnormal number of news articles,
ANews, as:
0 1
B Newsc, t C
ANewsc, t = log@1 + X A
1 8
News c , t − q
8 q=1

© 2018 International Review of Finance Ltd. 2018 21


International Review of Finance

Table 5 Level: company-level attention and returns


(1) (2)
ATickert ATickert
q ***
I1 Ret t −1 1.967 (7.80)
q
I2 Ret t −1 1.943*** (7.69)
q
I3 Ret t −1 1.941*** (7.70)
q
I4 Ret t −1 1.955*** (7.73)
q
I5 Ret t −1 1.960*** (7.73)
I1d Ret t −1 1.487*** (7.85)
I2d Ret t −1 1.439*** (7.68)
I3d Ret t −1 1.434*** (7.64)
I4d Ret t −1 1.454*** (7.65)
I5d Ret t −1 1.432*** (7.59)
I6d Ret t −1 1.450*** (7.72)
I7d Ret t −1 1.466*** (7.72)
I8d Ret t −1 1.440*** (7.64)
I9d Ret t −1 1.450*** (7.61)
d
I10 Ret t −1 1.464*** (7.76)
LMcapt−1 −0.00144 (−0.03) 0.00290 (0.06)
InstOwnt−1 0.0141 (1.01) 0.0138 (0.99)
AVlmt−1 0.0974*** (4.13) 0.0939*** (3.98)
ANewst−1 0.0160* (1.96) 0.0157* (1.90)
CFE Yes Yes
QFE Yes Yes
Adj R-squared 0.964 0.964
Observations 15,439 15,439
Diff. coeffs. 0.00633 0.0229
Diff. p-value 0.256 0.0280
P 0
Notes: The table reports estimates of β in the regression ATicker c, t = N i = 1 βi Ii Ret c, t −1 + Controls γ +
0 0
CFE δ1 + QFE δ2 + εc, t . ATickerc,t is abnormal search volume for the ticker of company c during week
t. IiRetc,t is an indicator function for weekly company returns sorted into quintile (column 1) or
decile (column 2) i. Controls are: (i) LMcapc,t, or the natural logarithm of the firms’ market capi-
talization; (ii) InstOwnc,t, the fraction of shares held by institutional investors; (iii) AVlmc,t, or
abnormal trading volume; (iv) and ANewsc,t, or abnormal number of news articles that mention
the firm each week. CFE and QFE are company and quarter fixed effects, respectively. We cluster
standard errors at the company level. The variables are normalized by dividing them by their
standard deviation. Diff. coeffs. and p-value denote the differences between the lowest- and
highest-quintile coefficients and their p-values. The t-test results are in parentheses. ***, **, and *
represent significance at the 1%, 5% and 10% levels.

Similarly to the previous subsections, we sort the weekly returns into quin-
tiles q as in equation (7); in this case, Retc,t is the weekly return on company c at
week t. We also sort the weekly returns into deciles d as a robustness check.
Table 5 shows the results for two different specifications of the following panel
regression:

22 © 2018 International Review of Finance Ltd. 2018


Negativity Bias in Attention Allocation

X
N
ATicker c, t = βi Ii Ret c, t − 1 + Controls0 γ + Q 0FE δ1 + C0FE δ2 + εc, t : ð11Þ
i=1

Table 6 shows the results for the regression specified as:

X
N
ATicker c, t = α + βi Pi Ret c, t − 1 + Controls0 γ + QFE0 δ1 + C0FE δ2 + εc, t : ð12Þ
i=1

q
where all sensitivity variables, Pi Ret t , are demeaned within their own quintile
groups as in the US- and state-level specification.
In the above two regression specifications, N may take the value 5 or 10, for
quintile and decile partitions, respectively. CFE and QFE are company and quar-
ter fixed effects, respectively. Controls used are LMcap, InstOwn, AVlm, and
ANews, as defined previously in this section. In the sensitivity regression we
double cluster standard errors by company and week. In the level regression,
since we drop the constant, we cluster standard errors by company.14
Paralleling what we found in earlier sections, Tables 5 and 6 show that an
increase in retail investors’ attention, as measured by ticker symbol searches, is
associated with extreme company returns during the previous week. In general,
coefficients (in absolute values) are larger and more significant for the extreme
quintiles (first column in each tables) and extreme deciles (second column).
Moreover, across all specifications, lagged negative returns are stronger predic-
tors of attention than positive returns. Wald tests performed on the decile
results of the level regression and the quintile and decile results of the sensitiv-
ity regression reject the hypothesis that the coefficient associated with the most
negative extreme (in absolute value) is equal to or lower than the one associated
with the most positive extreme at the 5% level for both tables.15
Both tables also show that attention at the stock level is positive and signifi-
cantly correlated with abnormal trading volume and abnormal news articles.
The result for abnormal trading volume is consistent with what we reported at
the US level in Section III above. The results do not, however, reveal a strong
relationship between attention and market capitalization or institutional own-
ership. In our view, the former is not surprising, since we are already control-
ling for market capitalization in the way we choose firms for our sample.
These findings for individual stocks reinforce the main contribution of this
paper. Investors display a negativity bias in attention allocation with respect to
extreme stock returns, even after controlling for known predictors of attention

14 Petersen (2009) implementation of Cameron et al. (2012)‘s procedure does not allow for
double clustering without a constant intercept.
15 The results remain similar when using ventiles and centiles in the level and sensitivity
regressions, with p-values of <0.1% for the level regressions, and 3.2% and 7.6% for ventiles
and centiles, respectively, in the sensitivity regressions.

© 2018 International Review of Finance Ltd. 2018 23


International Review of Finance

Table 6 Sensitivity: company-level attention and returns


(1) (2)
ATickert ATickert
q
P1 Ret t − 1 −0.0429 ***
(−3.20)
q
P2 Ret t − 1 −0.00117 (−0.12)
q
P3 Ret t − 1 0.0100 (1.30)
q
P4 Ret t − 1 −0.00198 (−0.25)
q
P5 Ret t − 1 0.00631 (0.84)
P1d Ret t −1 −0.0354*** (−2.96)
P2d Ret t −1 −0.00675 (−0.88)
P3d Ret t −1 −0.00356 (−0.32)
P4d Ret t −1 0.00153 (0.19)
P5d Ret t −1 0.00971 (1.55)
P6d Ret t −1 −0.00668 (−0.68)
P7d Ret t −1 −0.00821 (−1.08)
P8d Ret t −1 0.00584 (0.66)
P9d Ret t −1 −0.00644 (−0.66)
d 0.00134 (0.19)
P10 Ret t −1
LMcapt−1 0.0157 (0.32) 0.0106 (0.21)
InstOwnt−1 0.0145 (1.01) 0.0150 (1.05)
AVlmt−1 0.0969*** (4.03) 0.100*** (4.18)
ANewst−1 0.0155* (1.94) 0.0156* (1.95)
CFE Yes Yes
QFE Yes Yes
Adj R-squared 0.0203 0.0197
Observations 15,439 15,439
Diff. coeffs. 0.0365 0.0340
Diff. p-value 0.0120 0.0150
P
Notes: The table reports estimates of β in the regression ATicker c, t = α + N i = 1 β i Pi Ret c, t − 1 +
0 0 0
Controls γ + CFE δ1 + QFE δ2 + εc, t . ATickerc,t is abnormal search volume for the ticker of company
c during week t. PiRetc,t is defined as Retc,t × IiRetc,t, and it is demeaned within each quintile (col-
umn 1) or decile (column 2). IiRetc,t is an indicator function for company returns sorted into
quintile (column 1) or decile (column 2) i. Controls are: (i) LMcapc,t, or the natural logarithm of
the firms’ market capitalization; (ii) InstOwnc,t, the fraction of shares held by institutional inves-
tors; (iii) AVlmc,t, or abnormal trading volume; (iv) and ANewsc,t, or abnormal number of news
articles that mention the firm each week. CFE and QFE are company and quarter fixed effects,
respectively. We cluster standard errors at the company and week level using the Petersen (2009)
implementation of Cameron et al. (2012)‘s procedure. The variables are normalized by dividing
them by their standard deviation. Diff. coeffs. and p-value denote the differences between the
lowest- and highest-quintile coefficients and their p-values. The t-test results are in parentheses.
*,** and *** represent significance at the 10%, 5% and 1% levels.

such as news coverage and trading volume. This relationship is robust to differ-
ent specifications and holds at the aggregate and company-specific levels for
large US firms.

24 © 2018 International Review of Finance Ltd. 2018


Negativity Bias in Attention Allocation

V. ROBUSTNESS CHECKS

A. Institutional ownership
Da et al. (2011) find that SVI most likely measures individual, rather than insti-
tutional, investors’ attention. Therefore, the patterns we find in Section IV.C
should be more pronounced among companies with low institutional owner-
ship. To confirm this hypothesis, we split our sample of firms into low- and
high-institutional ownership groups, based on the median of the variable Ins-
tOwn.16 Tables 7 and 8 show the results of the analyses from column 2 of
Tables 5 and 6 for the low-ownership group (column 1) and the high-
ownership group (column 2).
Results show that the negativity bias is present in both the low- and high-
institutional ownership groups; however, it is more pronounced within the for-
mer. Although a Wald test for the difference between the lowest-highest decile
gaps in columns 1 and 2 is insignificant, several findings support the existence
of a difference between the two groups. Column 1 in both tables shows larger
coefficients (in absolute value) than column 2; significance values associated
with the extreme decile coefficients are larger in column 1 than in column 2;
and column 1 exhibits a larger difference between the two extreme decile coeffi-
cients (in absolute value) than column 2. In other words, the negativity bias
found in previous sections seems to be amplified among companies with a
larger fraction of individual investors, consistent with Da et al. (2011)‘s
findings.

B. Abnormal trading volume


Barber and Odean (2008), Gervais et al. (2001) and Hou et al. (2009) argue that
abnormally high trading volume is associated with information releases or large
price moves that attract investors’ attention. Therefore, it is possible that, in
our sample, stocks with extreme negative returns were traded more heavily
than stocks with extreme positive returns, which could explain the higher
levels of attention to the former. To test this hypothesis, we investigate how
our results vary across companies with high versus low (lagged) abnormal trad-
ing volume. We split our sample into two groups—companies with high abnor-
mal trading volume (i.e., AVlm above the sample median) and companies with
low abnormal trading volume (i.e., AVlm below the sample median).17Tables 7
and 8 show the results of the analyses from column 2 of Tables 5 and 6 for both
of these groups (in columns 3 and 4, respectively.)

16 For ease of comparison with previous results, the level and sensitivity variables, IiRetc,t and
PiRetc,t, remain sorted as in previous sections, that is, they are not recomputed conditional
on the institutional ownership split.
17 For ease of comparison with previous results, the level and sensitivity variables, IiRetc,t and
PiRetc,t, remain sorted as in previous sections, that is, they are not recomputed conditional
on the trading volume split.

© 2018 International Review of Finance Ltd. 2018 25


International Review of Finance

Table 7 Level: institutional own., trading vlm. and news


(1) (2) (3) (4) (5)
Low InstOwn High InstOwn Low AVlm High AVlm ANewst
*** *** *** ***
I1d Ret t −1 1.775 1.407 1.381 1.287 0.0660
(8.09) (3.95) (4.97) (5.28) (0.66)
I2d Ret t −1 1.729*** 1.360*** 1.336*** 1.253*** 0.0764
(8.11) (3.83) (4.89) (5.07) (0.78)
I3d Ret t −1 1.715*** 1.362*** 1.311*** 1.264*** 0.0849
(7.98) (3.85) (4.76) (5.12) (0.85)
I4d Ret t −1 1.740*** 1.380*** 1.346*** 1.267*** 0.0951
(7.98) (3.84) (4.78) (5.11) (0.95)
I5d Ret t −1 1.721*** 1.353*** 1.327*** 1.243*** 0.0840
(7.85) (3.82) (4.79) (5.03) (0.83)
I6d Ret t −1 1.740*** 1.369*** 1.347*** 1.264*** 0.0816
(8.05) (3.88) (4.84) (5.10) (0.82)
I7d Ret t −1 1.771*** 1.372*** 1.358*** 1.280*** 0.0641
(8.20) (3.84) (4.83) (5.13) (0.63)
I8d Ret t −1 1.721*** 1.369*** 1.327*** 1.260*** 0.0739
(7.96) (3.85) (4.79) (5.11) (0.75)
I9d Ret t −1 1.733*** 1.377*** 1.348*** 1.260*** 0.0691
(7.87) (3.85) (4.85) (5.04) (0.70)
d
I10 Ret t −1 1.749*** 1.385*** 1.364*** 1.265*** 0.0803
(8.04) (3.92) (4.97) (5.08) (0.80)
LMcapt−1 −0.0296 0.0509 −0.0475 0.00886 0.0174
(−0.49) (0.69) (−0.67) (0.17) (0.72)
InstOwnt−1 −0.0368 0.0100 0.0300 0.00530 −0.00526
(−0.92) (0.06) (1.53) (0.25) (−0.44)
AVlmt−1 0.0785** 0.110*** 0.164*** 0.0155 0.0176**
(2.46) (3.77) (5.25) (0.69) (2.23)
ANewst−1 0.0165 0.0112 0.0408** −0.00527
(1.52) (0.91) (2.60) (−0.65)
ATickert−1 0.0110
(1.14)
CFE Yes Yes Yes Yes Yes
QFE Yes Yes Yes Yes Yes
Adj R-squared 0.965 0.962 0.962 0.967 0.206
Observations 7707 7719 7719 7719 15,401
Diff. coeffs. 0.0253 0.0224 0.0172 0.0222 −0.0143
Diff. p-value 0.0838 0.0715 0.159 0.102 0.0939
Notes: See note on Table 5 for regression specification and variable definitions. Column 1 and
2 present results for the subsample of companies with low- and high-institutional ownership,
respectively. Column 3 and 4 show results for the subsample of companies with high and low
lagged trading volume, respectively. Column 5 presents results using ANews as the dependent
variable.

Results for the level regression, in columns 3 and 4 of Table 7, show that the
negative extreme decile coefficients are larger than all other coefficients; how-
ever, the difference between the lowest and highest coefficients is only

26 © 2018 International Review of Finance Ltd. 2018


Negativity Bias in Attention Allocation

Table 8 Sensitivity: institutional own., trading vlm. and news


(1) (2) (3) (4) (5)
Low InstOwn High InstOwn Low AVlm High AVlm ANewst
P1d Ret t −1 −0.0368 **
−0.0300 *
−0.0545 ***
0.000549 −0.00522
(−2.57) (−1.65) (−4.34) (0.07) (−0.55)
P2d Ret t −1 −0.0193** 0.00502 −0.0202 0.00441 0.00472
(−2.01) (0.49) (−1.64) (0.48) (0.52)
P3d Ret t −1 −0.0118 0.00490 0.00951 −0.00497 −0.00941
(−1.10) (0.30) (0.50) (−0.41) (−0.99)
P4d Ret t −1 −0.00203 0.00440 −0.0110 0.0121 0.00464
(−0.24) (0.31) (−1.11) (1.28) (0.59)
P5d Ret t −1 0.00524 0.0147* 0.00879 0.0130 −0.00768
(0.60) (1.93) (0.90) (1.44) (−0.87)
P6d Ret t −1 −0.00975 −0.00452 −0.00227 −0.00874 0.00257
(−0.83) (−0.31) (−0.15) (−0.88) (0.34)
P7d Ret t −1 −0.00980 −0.00593 −0.00934 −0.00547 −0.000793
(−1.21) (−0.51) (−0.80) (−0.56) (−0.11)
P8d Ret t −1 0.00827 0.00208 0.0198* −0.0103 0.0141
(0.66) (0.19) (1.65) (−0.91) (1.32)
P9d Ret t −1 −0.00833 −0.00712 −0.00115 −0.0136 0.00827
(−0.60) (−0.53) (−0.08) (−1.11) (1.12)
d
P10 Ret t −1 0.00533 −0.00756 −0.0173 0.00844 −0.00482
(0.82) (−0.73) (−1.33) (1.42) (−0.59)
LMcapt−1 −0.0213 0.0568 −0.0442 0.0107 0.0199
(−0.35) (0.72) (−0.59) (0.20) (0.77)
InstOwnt−1 −0.0344 0.0135 0.0306 0.00694 −0.00584
(−0.83) (0.08) (1.50) (0.32) (−0.45)
AVlmt−1 0.0833*** 0.119*** 0.172*** 0.0195 0.0141*
(2.60) (3.98) (5.19) (0.86) (1.71)
ANewst−1 0.0168 0.0114 0.0399*** −0.00509
(1.44) (0.96) (2.70) (−0.60)
ATickert−1 0.00988
(1.00)
CFE Yes Yes Yes Yes Yes
QFE Yes Yes Yes Yes Yes
Adj R-squared 0.0234 0.0191 0.0408 0.0184 0.0288
Observations 7707 7719 7719 7719 15,401
Diff. coeffs. 0.0314 0.0225 0.0372 −0.00789 0.000403
Diff. p-value 0.0346 0.0543 0.000163 0.157 0.237
Notes: See note on Table 6 for regression specification and variable definitions. Column 1 and
2 present results for the subsample of companies with low- and high-institutional ownership,
respectively. Column 3 and 4 show results for the subsample of companies with high and low
lagged trading volume, respectively. Column 5 presents results using ANews as the dependent
variable.

marginally significant in both subsamples. More importantly, all decile coeffi-


cients are larger for the group with high abnormal trading volume than for the
group with low abnormal trading volume, implying that abnormally high

© 2018 International Review of Finance Ltd. 2018 27


International Review of Finance

volume does attract more investor attention. However, some evidence of the
negativity bias still remains in the low abnormal volume group and this group
exhibits a larger difference between the two extreme decile coefficients. None-
theless, a Wald test for the difference between the lowest-highest decile gaps in
columns 3 and 4 is insignificant.
Regarding the sensitivity regression, results in columns 3 and 4 of Table 8
support the presence of a negativity bias among companies with high abnormal
volume, and show no statistical difference between extreme decile coefficients
for the group of companies with low abnormal volume. A Wald test for the dif-
ference between the lowest-highest decile gaps in columns 3 and 4 is significant
at the 1% level. In other words, results show that investors display the greatest
amount of sensitivity to a change in extreme returns when this change is
accompanied by high volume.

C. News coverage
We argue that the negativity bias in attention allocation comes from the effect
of negative events on investors’ psychological state. However, it is also possible
that negative events receive more media coverage, and that investors search for
market information more actively when exposed to this amplified media cover-
age when such events occur. If this is the case, we should also see the presence
of a negativity bias in news coverage. To test this alternative hypothesis, we use
analog regression specifications to the ones presented in Section IV.C, but with
ANews as dependent variable and ATicker as one of the controls.
Specifically, column 5 of Table 7 shows the results for the level regression:

X
N
ANewsc, t = βi Ii Ret c, t − 1 + Controls0 γ + Q 0FE δ1 + C0FE δ2 + εc, t : ð13Þ
i=1

Column 5 of Table 8 shows the results for the sensitivity regression:

X
N
ANewsc, t = α + βi Pi Ret c, t − 1 + Controls0 γ + QFE0 δ1 + C0FE δ2 + εc, t : ð14Þ
i=1

In the above two regression specifications, the Controls are LMcap, InstOwn,
AVlm, and ATicker, as defined in previous sections. Additionally, all sensitivity
q
variables, Pi Ret t , are demeaned within their own quintile groups as in previous
sections.
Contrary to our findings for ASVI in Section IV.C, these results for ANews
show no evidence of a negativity bias in news coverage. Results for the level
regression, in column 5 of Table 7, show no significant coefficients. Moreover,
the extreme negative decile coefficient is lower in value than its positive coun-
terpart, which, if it were significant, would be consistent with a positivity bias

28 © 2018 International Review of Finance Ltd. 2018


Negativity Bias in Attention Allocation

in news coverage. Similarly, results for the sensitivity regression, in column 5 of


Table 8, also present insignificant coefficients and show no evidence of a nega-
tivity bias in news coverage.

D. Distribution of returns
Positive and negative returns are not symmetrical events for stockholders. For
example, it is possible (albeit unlikely) that investors get a positive return on
their investment of more than 100%. However, even in the worst of crises, neg-
ative returns are always lower (in absolute value) than 100%. It is therefore a
valid concern that this potential asymmetry may cause skewness and drive our
negativity bias result.
Another concern arises from the choice of sample period. Because of data
availability, the sample period used here overlaps with the 2008–2010 financial
crisis, meaning that our sample may have more negative than positive return
outliers. These negative outliers could also be influencing the results.
The sets of returns used throughout this paper are displayed in six histo-
grams in Figure 5. The three left-hand plots—US-level at the top, state-level in
the middle, company-level at the bottom—demonstrate that there are more
negative than positive returns in our sample. Both negative and positive out-
liers seem fairly symmetric in the in-state and company returns; in the United
States returns, negative outliers are larger (in absolute value) than positive ones.
In quantitative terms, pooled aggregate returns in our sample are negatively
skewed at −0.72 for US-level returns and −0.13 for state-level returns. Con-
versely, pooled company-level returns are positively skewed at 0.69. All samples
have positive kurtosis at 10.86, 14.36, and 19.96 for US-, state-, and company-
level returns, respectively.
The quintile returns partitions used in our regressions partially account for
some of the problems mentioned above. An alternative and complementary
solution is to redistribute negative returns to replicate the distribution of posi-
tive returns, or vice versa. This can be done for each week and portfolio
(or stock) by applying the following procedure:

• If the return is positive, do not modify it.


• If the return is negative,
a Get the time-series returns associated with that portfolio (or company
stock) for the past 5 years.
b Sort these returns into two groups, one for positive returns and another
for negative returns.
c Find the percentile rank of the current (negative) return within the group
of negative returns.
d Find the (positive) return, within the group of positive returns, with per-
centile rank closest to the one in (c).
e Replace the current (negative) return with the negative of the positive
return from (d).

© 2018 International Review of Finance Ltd. 2018 29


International Review of Finance

90 90

80 80

70 70

60 60
Density

Density
50 50

40 40

30 30

20 20

10 10

0 0
−0.25 −0.2 −0.15 −0.1 −0.05 0 0.05 0.1 0.15 0.2 0.25 −0.25 −0.2 −0.15 −0.1 −0.05 0 0.05 0.1 0.15 0.2 0.25
Original Return Transformed Return

6000 6000

5000 5000

4000 4000
Density

Density

3000 3000

2000 2000

1000 1000

0 0
−0.5 −0.4 −0.3 −0.2 −0.1 0 0.1 0.2 0.3 0.4 0.5 −0.5 −0.4 −0.3 −0.2 −0.1 0 0.1 0.2 0.3 0.4 0.5
Original Return Transformed Return

4 4
x 10 x 10
12 12

10 10

8 8
Density

Density

6 6

4 4

2 2

0 0
−2 −1.5 −1 −0.5 0 0.5 1 1.5 2 −2 −1.5 −1 −0.5 0 0.5 1 1.5 2
Original Return Transformed Return

Figure 5 Distribution of returns.


Notes: The figure shows histograms for the sets of returns used throughout this paper, as
follows: (i) the top panel (i.e., horizontal pair of plots) presents aggregate US returns, used in
Section IV.A; (ii) the middle panel shows in-state returns, used in Section IV.B; and (iii) the
bottom panel displays the returns for 100 of the largest companies in the S&P 500, used in
Section IV.C. The histograms on the left side show the original returns; those on the right
side are the corresponding histograms for the transformed returns derived by a procedure
described in Section IV.D). [Color figure can be viewed at wileyonlinelibrary.com]

Thus, for a given rolling window in which the current negative return is the
most negative one and the maximum positive return is x, the above procedure
replaces the current negative return with −x. Basically, the procedure modifies

30 © 2018 International Review of Finance Ltd. 2018


Negativity Bias in Attention Allocation

each negative return, reshaping the 5-year rolling window return distribution
to be more symmetrical.18
This transformation of the original returns plotted in the histograms on the
left side of Figure 5 is shown for each case in the corresponding right-hand his-
togram. The densities for the positive range of returns (i.e., the positive side of
each plot) remain unchanged, given that new values are assigned only to nega-
tive returns. Overall, the transformed histograms seem more symmetrical and
balanced than the original ones in terms of outliers. Quantitatively, all skew-
ness values are now positive and larger (0.74 for US returns, 0.84 for state
returns and 0.73 for company-level returns) and the corresponding kurtosis
values are smaller (6.92, 13.43, and 18.66, respectively).
To test the robustness of the results after performing the transformation to
redistribute the returns, we rerun all previous regressions. The new results are
given in Tables 9 and 10; to simplify the presentation, only the company level
is shown. In general terms, these data show a higher economic significance of
the coefficients associated with extreme negative and positive returns in the
level regression and a lower significance (in absolute terms) for the sensitivity
regression. Consequently, the average difference between the coefficients for
the lowest and highest quintiles is also larger for the level regression and smal-
ler (but still positive) for the sensitivity regression. Therefore, after the transfor-
mation, the negativity bias in attention allocation remains.

VI. CONCLUSION

Psychology research supports the notion that negative events will produce
larger, more consistent or more intense consequences than positive events of
comparable magnitude. This negativity bias suggests that negative information
creates stronger impressions and attracts more attention in an automatic, unin-
tentional fashion than positive information.
This study related this negative–positive attention asymmetry to stock mar-
ket behavior. We argued that negative stock market performance attracts more
attention from retail investors than comparable positive performance. Specifi-
cally, we tested the hypothesis that individual investors pay more attention to
extreme negative than extreme positive returns.
Investor attention was measured using Google’s internet SVIs, a more direct
proxy for attention than traditional measures like trading volume, volatility,
and so on. From the SVI data, we constructed aggregate measures for three dif-
ferent types of attention, based on data from the United States as a whole as
well as individual states. StockMarket proxies for attention to the entire stock
market, OnlineTrading captures attention from potential market entrants, and
Etrade is associated with existing investors who own a brokerage account and
use Google to access it.

18 We also tried making the cross-sectional distribution (in the case of state- and company-
level returns) more symmetrical, with similar results.

© 2018 International Review of Finance Ltd. 2018 31


International Review of Finance

Table 9 Level: comp-level attention and redist. returns


(1) (2)
ATickert ATickert
q ***
I1 Ret t −1 2.074 (7.49)
q
I2 Ret t −1 2.046*** (7.40)
q
I3 Ret t −1 2.047*** (7.41)
q
I4 Ret t −1 2.061*** (7.43)
q
I5 Ret t −1 2.065*** (7.43)
I1d Ret t −1 1.545*** (7.17)
I2d Ret t −1 1.492*** (6.95)
I3d Ret t −1 1.485*** (6.94)
I4d Ret t −1 1.509*** (6.98)
I5d Ret t −1 1.488*** (6.91)
I6d Ret t −1 1.504*** (7.03)
I7d Ret t −1 1.521*** (7.05)
I8d Ret t −1 1.496*** (6.96)
I9d Ret t −1 1.505*** (6.95)
d
I10 Ret t −1 1.518*** (7.05)
LMcapt−1 −0.000893 (−0.02) 0.00264 (0.05)
InstOwnt−1 0.0112 (0.81) 0.0108 (0.78)
AVlmt−1 0.0974*** (3.97) 0.0936*** (3.83)
ANewst−1 0.0172** (2.05) 0.0169** (2.01)
CFE Yes Yes
QFE Yes Yes
Adj R-squared 0.964 0.964
Observations 15,037 15,037
Diff. coeffs. 0.00846 0.0279
Diff. p-value 0.196 0.0105
P 0
Notes: The table reports estimates of β in the regression ATicker c, t = N i = 1 βi Ii Ret c, t −1 + Controls γ +
0 0
CFE δ1 + QFE δ2 + εc, t . ATickerc,t is abnormal search volume for the ticker of company c during week
t. IiRetc,t is an indicator function for weekly company returns sorted into quintiles (column 1) or
deciles (column 2) i. Controls are: (i) LMcapc,t, or the natural logarithm of the firms’ market capi-
talization; (ii) InstOwnc,t, the fraction of shares held by institutional investors; (iii) AVlmc,t, or
abnormal trading volume; (iv) and ANewsc,t, or abnormal number of news articles that mention
the firm each week. CFE and QFE are company and quarter fixed effects, respectively. Returns are
redistributed to rule out the possibility that negative returns are stronger simply because they are
more unusual or have stronger outliers. We cluster standard errors at the company level. We clus-
ter standard errors at the company level. The variables are normalized by dividing them by their
standard deviation. Diff. coeffs. and p-value denote the differences between the lowest- and
highest-quintile coefficients and their p-values. The t-test results are in parentheses. ***, **, and
* represent significance at the 1%, 5% and 10% levels.

We found that aggregate US-level measures had positive contemporaneous


and lagged correlations with indirect proxies for attention, and StockMarket and
OnlineTrading exhibited the greatest amount of attention to extreme returns.
More importantly, lagged extreme negative returns were shown to be stronger

32 © 2018 International Review of Finance Ltd. 2018


Negativity Bias in Attention Allocation

Table 10 Sensitivity: comp-level attention and redist. returns


(1) (2)
ATickert ATickert
q
P1 Ret t − 1 −0.0303 ***
(−2.58)
q
P2 Ret t − 1 0.000642 (0.07)
q
P3 Ret t − 1 0.00988 (1.18)
q
P4 Ret t − 1 −0.000552 (−0.07)
q
P5 Ret t − 1 0.00452 (0.56)
P1d Ret t −1 −0.0202* (−1.95)
P2d Ret t −1 −0.00253 (−0.29)
P3d Ret t −1 0.00299 (0.30)
P4d Ret t −1 −0.00676 (−0.85)
P5d Ret t −1 0.00749 (0.99)
P6d Ret t −1 −0.00431 (−0.44)
P7d Ret t −1 −0.0118 (−1.47)
P8d Ret t −1 0.00870 (1.04)
P9d Ret t −1 −0.00455 (−0.54)
d 0.00000761 (0.00)
P10 Ret t −1
LMcapt−1 0.00930 (0.17) 0.00316 (0.06)
InstOwnt−1 0.0117 (0.82) 0.0120 (0.85)
AVlmt−1 0.0993*** (3.94) 0.102*** (4.03)
ANewst−1 0.0169** (2.05) 0.0171** (2.06)
CFE Yes Yes
QFE Yes Yes
Adj R-squared 0.0199 0.0193
Observations 15,037 15,037
Diff. coeffs. 0.0258 0.0202
Diff. p-value 0.0427 0.0814
P
Notes: The table reports estimates of β in the regression ATicker c, t = α + N i = 1 β i Pi Ret c, t − 1 +
0 0 0
Controls γ + CFE δ1 + QFE δ2 + εc, t . ATickerc,t is abnormal search volume for the ticker of company
c during week t. PiRetc,t is defined as Retc,t × IiRetc,t, and it is demeaned within each quintile (col-
umn 1) or decile (column 2). IiRetc,t is an indicator function for company returns sorted into
quintile (column 1) or decile (column 2) i. Controls are: (i) LMcapc,t, or the natural logarithm of
the firms’ market capitalization; (ii) InstOwnc,t, the fraction of shares held by institutional inves-
tors; (iii) AVlmc,t, or abnormal trading volume; (iv) and ANewsc,t, or abnormal number of news
articles that mention the firm each week. CFE and QFE are company and quarter fixed effects,
respectively. Returns are redistributed to rule out the possibility that negative returns are stronger
simply because they are more unusual or have stronger outliers. We cluster standard errors at the
company and week level using the Petersen (2009) implementation of Cameron et al. (2012)‘s
procedure. The variables are normalized by dividing them by their standard deviation. Diff.
coeffs. and p-value denote the differences between the lowest and highest-quintile coefficients
and their p-values. The t-test results are in parentheses. ***, **, and * represent significance at the
1%, 5% and 10% levels.

predictors than extreme positive returns of investor attention to the stock mar-
ket. State-level measures delivered similar results.
We also tested whether the negativity bias present at the United States and
state levels also exists at the company level. Attention to specific companies

© 2018 International Review of Finance Ltd. 2018 33


International Review of Finance

was measured using the SVI data for their ticker symbols in a sample of
100 large firms in the S&P 500. The results demonstrated that asymmetry in
attention allocation also held in the case of specific stocks case as individual
investors paid more attention to extreme negative returns affecting individual
companies than to comparable positive returns.
In general terms, our empirical results strongly support the idea that inves-
tors display a negativity bias in attention allocation with respect to extreme
stock returns. Across all specifications, a change in lagged negative extreme
returns generated a stronger increase in attention than a change in lagged posi-
tive extreme returns.
Finally, we performed several robustness checks to show that the negativity
bias in attention allocation with respect to extreme returns exists above and
beyond the effects of asymmetric media coverage and trading volume. We also
rule out the possibility that negative returns are stronger simply because they are
more unusual or because negative and positive returns are not symmetrical events
to the holder in terms of their distribution or number or the value of outliers.

Tomas Reyes
Department of Industrial and Systems Engineering
Pontificia Universidad Católica de Chile
Vicuna Mackenna 4860
Santiago
Chile
threyes@ing.puc.cl

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