How Wise Are Crowds? Insights from Retail Orders and Stock Returns

85 Pages Posted: 31 Aug 2010 Last revised: 24 Jan 2012

Eric K. Kelley

University of Tennessee

Paul C. Tetlock

Columbia Business School - Finance and Economics

Date Written: January 2012

Abstract

We analyze the role of retail investors in stock pricing using a database uniquely suited for this purpose. The data allow us to address selection bias concerns and to separately examine aggressive (market) and passive (limit) orders. Both aggressive and passive net buying positively predict firms' monthly stock returns with no evidence of return reversal. Only aggressive orders correctly predict firm news, including earnings surprises, suggesting they convey novel cash flow information. Only passive net buying follows negative returns, consistent with traders providing liquidity and benefitting from the reversal of transitory price movements. These actions contribute to market efficiency.

Keywords: market efficiency, retail investor behavior, return predictability, liquidity provision, financial news, private information

JEL Classification: G14

Suggested Citation

Kelley, Eric K. and Tetlock, Paul C., How Wise Are Crowds? Insights from Retail Orders and Stock Returns (January 2012). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1668706 or http://dx.doi.org/10.2139/ssrn.1668706

Eric K. Kelley

University of Tennessee ( email )

916 Volunteer Blvd
Knoxville, TN 37996
United States

Paul C. Tetlock (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
212-854-9895 (Fax)

HOME PAGE: http://www0.gsb.columbia.edu/faculty/ptetlock/

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