Limited Attention to Detail in Financial Markets

60 Pages Posted: 9 Jun 2016 Last revised: 28 Apr 2021

See all articles by Henrik Cronqvist

Henrik Cronqvist

University of Miami - Department of Finance

Tomislav Ladika

University of Amsterdam

Zacharias Sautner

Frankfurt School of Finance & Management; European Corporate Governance Institute (ECGI)

Date Written: April 23, 2021

Abstract

We show that firm valuations fell after a key expense became more visible in financial statements. FAS 123-R required firms to deduct option compensation costs from earnings, instead of disclosing them only in footnotes. Firms that granted high option pay experienced a significant earnings reduction, while fundamentals remained unchanged. These firms were more likely to miss analysts’ earnings forecasts, received recommendation downgrades, and experienced valuation declines. Effects were stronger among firms whose analysts and shareholders faced greater cognitive constraints on estimating option costs. These findings are consistent with market participants exhibiting limited attention to option costs prior to FAS 123-R.

Keywords: Limited attention, option expensing, analyst recommendations, earnings forecasts, FAS 123-R

JEL Classification: G41, G24, G18

Suggested Citation

Cronqvist, Henrik and Ladika, Tomislav and Sautner, Zacharias, Limited Attention to Detail in Financial Markets (April 23, 2021). University of Miami Business School Research Paper No. 2790960, Available at SSRN: https://ssrn.com/abstract=2790960 or http://dx.doi.org/10.2139/ssrn.2790960

Henrik Cronqvist

University of Miami - Department of Finance ( email )

5250 University Drive
220 Jenkins Building
Coral Gables, FL 33146
United States
(305) 284-9482 (Phone)

HOME PAGE: http://sites.google.com/site/henrikcronqvist/

Tomislav Ladika (Contact Author)

University of Amsterdam ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands
020-5255501 (Phone)

HOME PAGE: http://www1.fee.uva.nl/pp/tladika/

Zacharias Sautner

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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