Investor Attention and Stock Mispricing

This study examines the relation between investor attention and stock mispricing of accruals in U.S. firms using the Limited Investor Attention Model of Hirshleifer and Teoh (2003). Consistent with the model’s hypothesis that investor attention reduces stock mispricing, I document four key findings. First, I find a significant and negative correlation between stock mispricing and analyst following. Second, stock mispricing is negatively correlated with institutional ownership and, in particular, with the ownership of bank trusts and the ownership of pensions and endowments. Third, stock mispricing is negatively correlated with Big 4 auditor choice. Fourth, stock mispricing per dollar of accrual is decreasing in analyst following, institutional ownership, and Big 4 auditor choice for sufficiently large accruals.