Investor attention shocks and stock co-movement: Substitution or reinforcement?

The impact of investor attention allocation shocks on firm-level stock return co-movements with the market remains of great interest. Recent papers study this issue while showing that large national lottery jackpots act as shocks to investor attention. This paper contributes substantially to this stream of investigation. Motivated by studies in behavioral finance, we frame the role of shocks to investor attention as either substituting for investor attention or reinforcing it, with co-movements between the stock-level and the market level either increasing or decreasing respectively. We identify, in contrast to other studies, an economically significant reinforcement effect for the Chinese market. We find generally that large lottery jackpots increase, rather than decrease, allocation of investor attention to individual stocks, and, consequently, stock return co-movements with the market decrease rather than increase. An exception is the bear market of 1st January 2011–21st May 2014, where we find, as in earlier studies, jackpots associated with decreased attention. Compared to recent work on national lotteries and investor-attention allocation, our findings suggest far more contextual nuance to this topic than previously acknowledged. Our results should be of great interest to scholars interested in the impact of investor-attention allocation on financial markets, as well as to investment professionals.