Marius Zoican PRO
Finance professor at University of Toronto. Interested in securities exchanges, technology, and investments.
Charles Martineau and Marius Zoican
Bank of Lithuania October 16, 2020
How does investor attention impact analyst coverage choices?
Analyst objective
Maximize trading volume & revenue for brokerage house.
(Groysberg, Healy, and Maber, 2011)
Research question
Contributions
Results
A growing literature shows that investor attention plays an important role in asset pricing at determining, e.g.,:
However, we know little on how investor attention influence information supply in financial markets.
*using Shapley-Owen decomposition
Assets
Two risky-assets in zero net supply, paying off at t=2
1. A high-precision asset H:
2. A low-precision asset L:
Agents
Each investor j can acquire unbiased signals about stock i:
Investors choose the signal precision, but have finite learning (attention) capacity K:
Learning cost is lower if more analysts cover stock i
(through a "familiarity" argument):
(note decreasing returns to scale)
(i) Conjecture linear price:
(ii) Optimal demand from investor j, conditional on signal:
(iii) Market clearing condition:
(iv) Clearing price:
Following Verrecchia (1982), problem boils down to:
Posterior precision
A measure of price impact
Investors have zero mass so take price as given.
Problem becomes:
Text
Attention constraint
The expected volume in a given stock i is:
Mechanism
If analyst j covers stock H, her utility is:
If analyst j covers stock H, her utility is:
If analyst j covers stock L, her utility is:
The equilibrium probability to cover stock H is:
Example: If stock L has a payoff variance 3x that of stock $H$, it can have up to 10x more analyst coverage in expectation
The implications of our model match empirical patterns: the significant analyst coverage clustering in U.S. equities.
By Marius Zoican
Seminar presentation at the Bank of Lithuania on October 16, 2020.
Finance professor at University of Toronto. Interested in securities exchanges, technology, and investments.