LAUSR

Abstract The purpose of this paper is to examine the dynamic relationship between retail investor attention and stock liquidity. Using high-frequency data for China’s stock market, we find that retail investor attention, measured by Baidu search volume, has a significantly positive short-term effect on future stock liquidity. When the time horizon expands, however, the positive effect weakens and eventually reverses after four weeks. More importantly, the observed short-term improvement on stock liquidity is mainly attributable to attention-induced retail investor net-buys. Taking advantage of variations of retail investor attention to stocks, sophisticated traders with superior information appear to engage in trades against retail investors. Overall, our findings help practitioners, academics, and policy makers understand the nature of retail investor attention and its consequences regarding trading behavior and stock liquidity.