Why Do Individual Investors Disregard Accounting Information? The Roles of Information Awareness and Acquisition Costs

Abstract

Individual investors often neglect value-relevant accounting information and instead underperform by trading on technical trends. We investigate the frictions that impede individual investors’ use of accounting information, and in particular their costs of monitoring and acquiring accounting disclosures. We do so using an archival setting where individuals are presented with automated media articles that report both current earnings news and past stock returns. Although these investors have earnings information readily available, we find no evidence that their trades incorporate earnings news. Instead we find that they trade in response to the trailing stock returns presented in the articles. Our study raises questions about the likely efficacy of regulations that aim to aid less sophisticated investors by increasing their awareness of, and access to, accounting information.

Keywords: information costs, trading volume, media, earnings announcements, automation, technical trading

JEL Classification: M41, D83, G12, G14