Investor attention and the salience effect in the Chinese stock market: Insights from the COVID-19 pandemic

We investigate the relationship between investor attention and the salience effect (i.e. a negative relation between salience measures and subsequent returns (Cosemans & Frehen, 2021)) in the Chinese stock market using the COVID-19 pandemic as an exogenous shock to attention. We find that COVID-19 significantly distracted individual investors’ attention from stock market activities, leading to a weaker salience effect. However, institutional investors increased their attention during COVID-19 by attending more investor-firm interactive activities. Furthermore, we show that the reduction in retail attention during the COVID period is stronger for negative salient returns than for positive salient returns. As a result, the reduced salience effect during the pandemic is more pronounced for stocks with salient downsides than for stocks with salient upsides. These results indicate that investor attention causes the salience effect.