What you Watch in Markets Matters: Attention to Information Versus Attention to Prices

Journal: Abacus
In financial markets, attention is usually treated as a good thing. If more investors are watching a stock, prices may be expected to become more accurate. In the paper, the researchers ask a slightly different question: attention to what? Watching company news is very different from watching price movements, and the two can have very different effects on markets. The researchers separate investor attention into two types. The first is attention to fundamental information, such as earnings announcements or other company news. The second is attention to price movements, such as sharp recent increases or decreases that attract traders looking for momentum, excitement, or quick gains.

To measure attention to information, the researchers use detailed order-level data from the Australian Securities Exchange. The idea is straightforward. It is assumed that a company releases important news overnight. An attentive investor with an old order already placed in the market is likely to cancel or revise that order before trading begins. An inattentive investor may leave the old order unchanged and trade at a price that no longer reflects the latest information. By studying how often investors revise orders after important announcements, the researchers develop a measure of whether investors are paying attention to information.

To measure attention to prices, discussions on stock market forums that are popular with day traders and short-term traders, are used. These forums helped identify stocks that attract investor interest because of price action rather than company fundamentals. The findings show why this distinction matters. Stocks with high attention to information adjust to news more quickly. In these stocks, prices are less likely to drift slowly after announcements, suggesting that information is incorporated faster. In contrast, attention to price movements does not improve the market’s response to news. It is more common in momentum and lottery-like stocks, where investors may be drawn by excitement rather than careful analysis.

The research also shows that this distinction has practical value. Trading strategies based on company announcements perform substantially better when they focus on stocks with low attention to information, where the market is slower to react. By contrast, focusing on attention to prices does not deliver similar benefits.

The broader takeaway is especially relevant in an age of trading apps, social media and constant market chatter. More attention is not always better. Markets become more efficient when investors pay attention to meaningful information, not merely to moving prices.