Retail Investors’ Contrarian Behavior Around News, Attention, and the Momentum Effect

53 Pages Posted: 5 Apr 2020 Last revised: 26 May 2022

See all articles by Cheng Luo

Cheng Luo

affiliation not provided to SSRN

Enrichetta Ravina

Federal Reserve Bank of Chicago; Center for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Marco Sammon

Harvard Business School

Luis M. Viceira

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Date Written: May 18, 2022

Abstract

Using a large panel of U.S. brokerage accounts trades and positions, we show that a large fraction of retail investors trade as contrarians after large earnings surprises, especially for loser stocks, and that such contrarian trading contributes to post earnings announcement drift (PEAD) and price momentum. Indeed, when we double-sort by momentum portfolios and retail trading flows, PEAD and momentum are only present in the top two quintiles of retail trading intensity. Finer sorts confirm the results, as do sorts by firm size and institutional ownership level. We show that the investors in our sample are representative of the universe of U.S. retail traders, and that the magnitude of the phenomena we describe indicate a quantitively substantial role of retail investors in generating momentum. Alternative hypotheses, such as the disposition effect and stale limit orders, do not explain retail contrarian trading. Younger traders are more likely to be contrarian, and a firm’s dividend yield, leverage, size, book to market, and analyst coverage are associated with the fraction of contrarian trades they face around earnings announcements. Attentive investors are more likely to be contrarians.

Keywords: Retail Investors; Momentum; Earnings Surprises

JEL Classification: G02; G11; G14

Suggested Citation

Luo, Cheng and Ravina, Enrichetta and Sammon, Marco and Viceira, Luis M., Retail Investors’ Contrarian Behavior Around News, Attention, and the Momentum Effect (May 18, 2022). Available at SSRN: https://ssrn.com/abstract=3544949 or http://dx.doi.org/10.2139/ssrn.3544949

Cheng Luo

affiliation not provided to SSRN

Enrichetta Ravina (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

HOME PAGE: http://https://sites.google.com/view/eravina/research

Center for Economic Policy Research (CEPR) ( email )

33 Great Sutton Street
London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
Brussels
Belgium

Marco Sammon

Harvard Business School ( email )

Boston, MA 02163
United States

Luis M. Viceira

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6331 (Phone)
617-496-6592 (Fax)

HOME PAGE: http://www.people.hbs.edu/lviceira

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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