The Trading Response of Individual Investors to Local Bankruptcies

We use data from a German online brokerage and a survey to show that retail investors sharply reduce risk-taking in response to nearby firm bankruptcies, which are not predictive of returns. The effects on trading are spatially highly concentrated, immediate and not persistent. They seem to operate through more pessimistic expected returns and increased risk aversion and do not reflect wealth effects or changes in background risks. Investors learn about bankruptcies through immediate coverage in local newspapers. Our findings suggest that non-informative local experiences that make downside risks of stock investment more salient contribute to idiosyncratic short-term fluctuations in trading.

Keywords: Individual Investors, Risk-Taking, Trading, Experiences

JEL Classification: D14, G11

Suggested Citation: Suggested Citation

Laudenbach, Christine and Loos, Benjamin and Pirschel, Jenny and Wohlfart, Johannes, The Trading Response of Individual Investors to Local Bankruptcies (March 20, 2020). CEBI Working Paper Series, Working Paper 08/20, 2020, Available at SSRN: https://ssrn.com/abstract=3559402 or http://dx.doi.org/10.2139/ssrn.3559402