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

Abstract

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 in which 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 it. Instead we find that their trading responds to the trailing stock returns presented in the articles. Our study raises questions about the efficacy of regulations that aim to aid less sophisticated investors by increasing their awareness of and access to accounting information.

Keywords: information costs; information awareness; information acquisition; individual investors; earnings announcements; trading volume; automation

JEL Classification: D83; G12; G14; M41