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Individual Investors and Corporate Earnings

Daniel J. Taylor

University of Pennsylvania - The Wharton School

January 31, 2010

This study examines the effect of earnings announcements on individual investors’ trading decisions and their trading profits. Consistent with earnings news informing the trading decisions of individual investors, I find that earnings announcements are associated with significant increases in individual investor market participation, and that these increases persist even after controlling for the information in prices. Moreover, and in contrast to the conventional wisdom that disclosure benefits unsophisticated investors at the expense of more sophisticated investors, I find that individuals’ trades around earnings announcements earn economically and statistically significant losses, and that these losses are significantly greater than the losses of non-announcement trades. Consistent with these losses resulting from inefficient information processing, I find the higher the information content of the earnings announcement the greater the loss, and that increased losses around earnings announcements are concentrated among those individual investors who are not classified as affluent or active traders. Given the limited information processing ability of individual investors, the results suggest a more nuanced view of the welfare effects of disclosure.

Number of Pages in PDF File: 60

Keywords: individual investors, earnings, earnings announcements, disclosure, trading profits

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Date posted: November 13, 2010  

Suggested Citation

Taylor, Daniel J., Individual Investors and Corporate Earnings (January 31, 2010). Available at SSRN: http://ssrn.com/abstract=1707030 or http://dx.doi.org/10.2139/ssrn.1707030

Contact Information

Daniel Taylor (Contact Author)
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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References:  72
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