Does Big Brother Get More Attention? - A Study on Investor (In)attention and Focus on Well-covered Companies

Abstract: This thesis examines the attention span of investors by observing the impact of earnings surprises on the abnormal return on the announcement day - as proxy of attention we have chosen to look at the number of analysts following the firms. Two hypotheses constituted the foundation for our study. First, we expected that the amount of analyst coverage that a firm received would affect the investors' response to earnings surprises on the announcement day. The effect would ultimately be conveyed as a negative effect on the magnitude of abnormal returns the more attention the firm received. Second, we expected less-covered firms to be neglected by investors on days when their earnings announcements coincide with the earnings announcements of well-covered firms. The attention diversion of the well-covered firms would then cause an underreaction to earnings surprises of lesscovered firms. We focus on the Swedish stock market due to its specific characteristics, with few large companies constituting a vast amount of total market value. Using a data sample from 1994-04- 30 to 2011-04-30 we conclude that while there is some support for the first hypothesis, the data suggests that investors in less covered firms are not distracted by the announcements of well-covered firms.