Limited Attention to Detail in Financial Markets: Evidence from Reduced-form and Structural Estimation

Authors

Henrik Cronqvist, Chapman UniversityFollow
Tomislav Ladika, University of Amsterdam
Elisa Pazaj, University of Amsterdam
Zacharias Sautner, University of Zurich

Document Type

Article

Publication Date

3-4-2024

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 in footnotes. Firms that granted high option pay experienced earnings reductions, while fundamentals remained unchanged. These firms were more likely to miss earnings forecasts, and they experienced recommendation downgrades and valuation declines. Our findings suggest that market participants exhibited limited attention to option costs before FAS 123-R. As we reuse the FAS 123-R natural experiment, we show how one can address confounding channels by integrating reduced-form and structural estimation.

Comments

This article was originally published in Journal of Financial Economics, volume 154, in 2024. https://doi.org/10.1016/j.jfineco.2024.103811

Recommended Citation

Cronqvist, H., Ladislav, T., Pazaj, E., Sautner, Z, 2024. Limited attention to detail in financial markets: Evidence from reduced-form and structural estimation. J. Financ. Econ. 154, 103811. https://doi.org/10.1016/j.jfineco.2024.103811

Peer Reviewed

1

Copyright

The authors

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 License.