Hirshleifer Teoh Lim 2009 JF

THE JOURNAL OF FINANCE • VOL. LXIV, NO. 5 • OCTOBER 2009

Driven to Distraction: Extraneous Events and
Underreaction to Earnings News
DAVID HIRSHLEIFER, SONYA SEONGYEON LIM, and SIEW HONG TEOH∗

ABSTRACT
Recent studies propose that limited investor attention causes market underreactions.
This paper directly tests this explanation by measuring the information load faced by investors. The investor distraction hypothesis holds that extraneous news inhibits market reactions to relevant news. We find that the immediate price and volume reaction to a firm’s earnings surprise is much weaker, and post-announcement drift much stronger, when a greater number of same-day earnings announcements are made by other firms. We evaluate the economic importance of distraction effects through a trading strategy, which yields substantial alphas. Industry-unrelated news and large earnings surprises have a stronger distracting effect.

[Attention] is the taking possession by the mind in clear and vivid form, of one out of what seem several simultaneously possible objects or trains of thought . . . It implies withdrawal from some things in order to deal effectively with others.
William James, Principles of Psychology, 1890
Almost a quarter of British motorists admit they have been so distracted by roadside billboards of semi-naked models that they have dangerously veered out of their lanes.
Reuters (London), November 21, 2005
IN SEVERAL KINDS of tests, there is on average a delayed price reaction to news that has the same sign as the immediate response. This phenomenon is ref lected in the new issue and repurchase puzzles (Loughran and Ritter (1995), Ikenberry,
∗ Hirshleifer and Teoh are at Paul Merage School of Business, University of California, Irvine and Lim is at Kellstadt Graduate School of Business, DePaul University, Department of Finance,
Chicago, Illinois. We thank an anonymous referee; Nick Barberis; Nerissa Brown; Werner DeBondt;
Stefano DellaVigna (NBER conference

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