Abstract
As Saudi Arabia recently opened its stock market to international investors, there are strong interests in the uniqueness of Saudi stock markets. Unique features of Saudi markets include the dominance of retail trading and many limits-to-arbitrage. Saudi investors tend to pay strong attention to stocks with recent extreme price appreciations. Among these lottery-like stocks, investors tend to bid up (down) stock prices of profitable (unprofitable) firms gradually, generating a stock return predictability by firm profitability. The evidence suggests that investors’ short-term attentions have significant effects on Saudi stock returns, providing both opportunities and risks for informed investors in Saudi markets.
•We use the MAX measure to capture a stock's recent extreme price appreciation.•High MAX stocks attract strong investor attention and trades in Saudi Arabia.•Higher firm profitability predicts higher stock returns in Saudi Arabia.•The profitability-stock return effect in Saudi is concentrated among high MAX firms.•Changing investor attention appears to drive the profitability effect in Saudi.