We show that demand effects generated by institutional frictions can influence systematic return predictability patterns in stocks and mutual funds. Identification relies on a reform to the Morningstar rating system, which we show caused a structural break in style-level positive feedback trading by mutual funds. As a result, momentum-related factors in stocks, as well as performance persistence and the “dumb money effect” in mutual funds, experienced a sharp decline. Consistent with the proposed channel, return predictability declined right after the reform, was limited to the U.S. market, and was concentrated in factors and mutual funds most exposed to the mechanism.

We show that attention constraints on decision-makers create barriers to financial inclusion. Using administrative data on retail loan-screening processes, we find that attention-constrained loan officers exert less effort reviewing applicants of lower socioeconomic status (SES) and reject them more frequently. More importantly, when externally imposed increases in loan officers’ workloads tighten attention constraints, loan officers are even more prone to quickly reject low-SES applicants but quickly accept very high-SES applicants without careful review. Such selective attention allocation further widens the approval rate gap between high- and low-SES applicants—a unique prediction of this attention-based mechanism.