All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors
Brad M. Barber, University of California at Davis
Terrance Odean, University of California at Berkeley

We test the hypothesis that individual investors are more likely to be net buyers of attention-grabbing stocks than are institutional investors. We speculate that attention-based buying is a result of the difficulty that individual investors have searching the thousands of stocks they can potentially buy. Individual investors don’t face the same search problem when selling, because they tend to sell only a small subset of all stocks-those they already own. We look at three indications of how likely stocks are to catch investors’ attention: daily abnormal trading volume, daily returns, and daily news. We calculate net order imbalances for more than 66,000 individual investors with accounts at a large discount brokerage, 647,000 individual investors with accounts at a large retail brokerage, 14,000 individual investor accounts at a small discount brokerage, and 43 professional money managers. Individual investors tend to be net purchasers of stocks on high attention days-days that those stocks experience high abnormal trading volume, days following extreme price moves, and days on which stocks are in the news. Institutional investors are more likely to be net buyers on days of low abnormal trading volume than on those with high abnormal trading volume. Their reaction to extreme price moves depends upon their investment style. The tendency of individual investors to be net buyers of attention-grabbing stocks is greatest on days of negative returns. We speculate that this tendency may contribute to momentum in small stocks with losses. (Accepted Spring 2002.)

Members who trade equities must be sensitive to the origins of liquidity, whether they be rational or seemingly not. This study documents a tendency for individual traders to buy stocks in the news, those with high volumes and large price changes.