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DOI: 10.1111/irﬁ.12180

Allocation: Retail Investors’

Reaction to Stock Returns*

TOMAS REYES

Department of Industrial and Systems Engineering, Pontiﬁcia Universidad Católica de

Chile, Santiago, Chile

ABSTRACT

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.

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.

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

Negativity Bias in Attention Allocation

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.

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.

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

2 http://www.google.com

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

Negativity Bias in Attention Allocation

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.

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

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

International Review of Finance

(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.

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

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.

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.

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

Negativity Bias in Attention Allocation

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.

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.

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.

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]

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)

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]

Negativity Bias in Attention Allocation

5

x 10

1 2.5

Attention from Potential Market

Entrants

New Accounts (TD Ameritrade)

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]

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.

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)

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

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

(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).

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).

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

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

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.

International Review of Finance

(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

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.

International Review of Finance

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.

Negativity Bias in Attention Allocation

(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)

SFE Yes Yes Yes

QFE Yes Yes Yes

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)

SFE Yes Yes Yes

QFE Yes Yes Yes

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.

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.

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

International Review of Finance

(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:

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

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.

International Review of Finance

(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.

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.

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.

International Review of Finance

(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

Negativity Bias in Attention Allocation

(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.

cients are larger for the group with high abnormal trading volume than for the

group with low abnormal trading volume, implying that abnormally high

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

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

Negativity Bias in Attention Allocation

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 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).

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

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

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.

International Review of Finance

(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.

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

Negativity Bias in Attention Allocation

(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

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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