Does it pay to pay attention to attention? Evidence from an emerging market

Purpose This study aims to explore the asset pricing implications of attention allocation theories in the Indian stock market. Design/methodology/approach Investor attention is captured through investors' search behavior, the Google search volume index. Panel least square method is used in this study, and the research is performed at firm-level upon NSE100 constituent firms with 21,566 firm-week observations. Findings The authors find a significant increase in abnormal return following an increase in abnormal attention. Also, this effect is strengthened for smaller firms and firms with positive sentiments. Further, applying a geographic lens to the investigation, it is found that the attention impact is attributable to local investors. Finally, the study demonstrates that local attention-based portfolio formation and trading strategy, i.e. long in high abnormal local attention stocks and short in low abnormal local attention stocks, leads to a significant return premium. Research limitations/implications This study reveals that behavioral factors like investor attention drive the Indian Stock Market. Also, the geography analysis shows that observing investors' behavior enables predicting the arrival of private information. Thus abnormal local attention can be a potential input factor for forecasting exercises and trading strategy formation, thereby aiding in exploiting profitable opportunities. Originality/value The study captures asset pricing implications of investor attention and explores the effect of firm size and sentiment on the attention-return relationship in an emerging economy, India. It also relates location proximity with investors' attention allocation and tests its implications on stock prices.