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.