The asymmetric effect of retail investor attention: new evidence from post-recommendation revision drift

ABSTRACTThis paper investigates the effect of retail investor attention on market reaction following analysts’ recommendation revisions in the Chinese stock market. The results suggest that the impact of retail attention on post-recommendation revision drift is asymmetric. Specifically, retail attention mitigates post-upgrade announcement drift, whereas it aggravates post-downgrade drift. After a series of arrangements to address the potential endogeneity concerns and ensure robustness, the results still hold. Moreover, we reveal retail attention facilitates the absorption of individual firms’ information and increases liquidity to attenuate post-upgrade drift, whereas retail attention induces underreaction due to short-sale restrictions and disposition effects regarding stronger post-downgrade drifts. The results of the additional heterogeneity test provide further evidence of channel tests and reveal that prior positive sentiment can accelerate the integration of good news into stock prices. These findings enrich the existing literature on retail investors’ role in the price discovery process following the release of fundamental information.KEYWORDS: Analyst recommendation revisionsinvestor attentionpost-recommendation revision driftChinese stock marketJEL CLASSIFICATION: G10G14 Supplemental materialSupplemental data for this article can be accessed online at https://doi.org/10.1080/00036846.2023.2287557Disclosure statementNo potential conflict of interest was reported by the author(s).Notes1 It is one of main feature in Chinese stock market. The short-sale restrictions have been slightly relaxed since March 31, 2010. Although the list of stocks without short-sale restrictions is gradually expanding, individual investors must meet certain thresholds before they can open their security account, such as the average daily assets of more than 500,000 yuan in the 20 trading days before opening.2 We also adopt audit quality (firm audited by the Big 4 auditing firms or not) and firm’s size to capture information transparency, the results are accordance with Panel A in Table 4. To conserve space, the results are not reported here.3 Approximately one third of all Chinese retail investors lack a high school education and a 2014 survey reports that the majority of new account openings were by investors who did not have a high school degree (Titman, Wei, and Zhao Citation2022).4 According to previous studies, Lu, Li, and Chen (Citation2022) finds in about 90% cases the holding periods are less than 20 trading days base on individual investors’ stock trading records in Shanghai stock market between year 2011 and 2017. According to Jones et al. (Citation2022)’s estimate base on account-level data from 2016 to 2019, the holding periods for retail investors with means of approximately 50 days. Thus, we select 30 trading days as average retail investors holding horizon approximately.5 In the spirit of Titman, Wei, and Zhao (Citation2022), we also separate the sample into high and low market capitalization groups and the results are accordant.Additional informationFundingThis research was supported by the National Natural Science Foundation of China [grant no. 72371158].