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Investor Attention and the Use of Leverage

We investigate the effects of the use of different sources of investment leverage, i.e. securities with embedded leverage and traditional margin accounts, on the portfolio performance of retail investors, recognizing that these effects may be conditional on investor attention. We find that investors who trade on margin underperform those who do not have margin accounts, but we also find that investors who trade securities with embedded leverage show an even poorer performance than investors who trade on margin. The negative effect of leverage usage decreases with greater investor attention, measured by portfolio monitoring frequency. These results suggest that more attentive investors gain more from the use of investment leverage.