In Short Supply: Efficiency Implications of Rational Attention Allocation

This paper examines the role of rational attention allocation in shaping private information acquisition, and its implications for price informativeness and real outcomes. Our setting exploits the listing of options on a stock as a source of variation in the relative value of acquiring information on its close industry peers. Consistent with the predictions of our theoretical model, we find that options listing on peer firms’ stocks is associated with declines in attention and price informativeness, and an increase in return volatility. These changes are accompanied by declines in investment-price sensitivity and profitability, indicating a deterioration of market feedback.

This paper was accepted by Camelia Kuhnen, finance.

Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.07233.