When does attention matter? The effect of investor attention on stock marketvolatility around news releases

We empirically investigate how retail and institutional investor attention is related to the way stock marketsprocess information. With a focus on 360 US stocks in the S&P 500 universe, our results show that higher retailinvestors' attention around news releases increases the post-announcement stock return volatility, whereasinstitutional investor attention has a small but negative impact on volatility on days following news releaseson average over the cross-section of companies. These findings are in line with the hypotheses that attentionof retail investors slows price-adjustments to new information and attention of institutional investors resultsin the opposite reaction. We show that these effects are heterogeneous in the type of news and the topic ofthe information being released. A portfolio allocation application highlights that these results are not onlystatistically significant but also sizeable in economic terms and can lead to an overperformance as large asdozens of basis points.