Market Returns and a Tale of Two Types of Attention

We provide novel evidence that aggregate investor attention to stocks predicts marketwide returns, but with a striking difference across investor clienteles. Daily aggregate retail attention (ARA) negatively predicts one-week-ahead market returns, is associated with aggregate retail order imbalance and flows to equity mutual funds, and exhibits a stronger predictability during periods of high marketwide uncertainty, poor liquidity, or more costly short selling. In contrast, aggregate institutional attention (AIA), when observed before major news announcements, positively predict future marketwide returns. In cross-sectional analysis, we show that the predictability is stronger for ARA among illiquid stocks and for AIA among high-beta stocks. The predictability results are robust out-of-sample and correspond to meaningful expected utility gains even for diversified investors. The findings are consistent with the idea that attention-driven retail buying can generate an aggregate price pressure on the stock market, whereas institutional attention precedes the resolution of marketwide uncertainty and the accrual of risk premiums. This paper was accepted by Will Cong, finance. Funding: J. Hua acknowledges the Professional Staff Congress-City University of New York Research Foundation for financial support. L. Peng acknowledges the Wasserman Summer Research Grant and the Krell Research Fund for financial support. T.C.-C. Hung acknowledges research support from the Ministry of Science and Technology, Taiwan [Grants 110-2410-H-002-245 and 111-2410-H-002-197], and the E. Sun Academic Award. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.01294 .