Effects of Information Overload on Financial Market Returns: How Much Is Too Much?

Abstract

We exploit textual analysis tools and study the effects of information overload—an excess level of information faced by decision-makers—on future stock market returns using daily data from the New York Times over eight decades. Information overload increases information and estimation risk, reduces the decision accuracy amid investors’ limited attention and in- formation processing capabilities. Controlling for well-known predictors of returns, we find that excessive information leads higher future excess returns and lower trading volume. The predictive power of information overload over returns is persistent and reverses in about two years. Finally, information overload affects the cross-section of stock returns via a demand shock or limits to arbitrage. Investors require higher risk premia to hold small, high beta, high volatile, and unprofitable stocks.