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Paying Attention: Overnight Returns and the Hidden Cost of Buying at the Open

Published online by Cambridge University Press:  19 April 2012

Henk Berkman ,
Paul D. Koch ,
Laura Tuttle  and
Ying Jenny Zhang
Henk Berkman
Affiliation:
h.berkman@auckland.ac.nz, Business School, University of Auckland, 12 Grafton Rd, Auckland, New Zealand; Koch
Paul D. Koch
Affiliation:
pkoch@ku.edu, School of Business, University of Kansas, Summerfield Hall, Lawrence, KS 66045
Laura Tuttle
Affiliation:
ltuttle@aus.edu, School of Business and Management, American University of Sharjah, PO Box 26666, Sharjah, United Arab Emirates
Ying Jenny Zhang
Affiliation:
yjennyzhang@missouristate.edu, College of Business Administration, Missouri State University, 901 S National Ave, Springfield, MO 65897
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Abstract

We find a strong tendency for positive returns during the overnight period followed by reversals during the trading day. This behavior is driven by an opening price that is high relative to intraday prices. It is concentrated among stocks that have recently attracted the attention of retail investors, it is more pronounced for stocks that are difficult to value and costly to arbitrage, and it is greater during periods of high overall retail investor sentiment. The additional implicit transaction costs for retail traders who buy high-attention stocks near the open frequently exceed the effective half spread.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 4 , August 2012 , pp. 715 - 741
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

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