Glued to the TV: Distracted Retail Investors and Stock Market Liquidity

We investigate how distraction affects the trading behavior of retail investors, and ultimately market liquidity. Exploiting episodes of sensational news exogenous to the stock market, we first document that investors stop trading altogether when they are distracted. We report further that these effects are more pronounced for more overconfident–i.e., single-male and active–investors, who are typically viewed as noise traders. We then exploit these sensational news events to study how shocks to noise trading affect the stock market at large and in particular its liquidity. Our results are most consistent with an adverse selection model of price impact, and are not supportive of inventory risk models. ________________ * Preliminary and incomplete, please do not cite without permission. Joel Peress is at INSEAD, Boulevard de Constance, 77300 Fontainebleau, France. Email: [email protected]. Daniel Schmidt is at HEC Paris, 1 rue de la Liberation, 78350 Jouy-en-Josas, France. Email: [email protected]. We are grateful to David Strömberg for sharing detailed news pressure data including headline information and to Terry Odean for providing the large discount brokerage data. We thank Thierry Foucault and Jacob Sagi for their valuable comments, as well as seminar participants at the Marshall School of Business. Joel Peress thanks the AXA Research Fund and the Institut Europlace de Finance for their financial support.