The Trading Response of Individual Investors to Local Bankruptcies

89 Pages Posted: 30 Mar 2020

See all articles by Christine Laudenbach

Christine Laudenbach

Goethe University Frankfurt

Benjamin Loos

Technische Universität München (TUM) - TUM School of Management

Jenny Pirschel

ZEW – Leibniz Centre for European Economic Research

Johannes Wohlfart

University of Copenhagen

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Date Written: March 20, 2020

Abstract

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

Laudenbach, Christine and Loos, Benjamin and Pirschel, Jenny and Wohlfart, Johannes, The Trading Response of Individual Investors to Local Bankruptcies (March 20, 2020). SAFE Working Paper No. 272. Available at SSRN: https://ssrn.com/abstract=3560944 or http://dx.doi.org/10.2139/ssrn.3560944

Christine Laudenbach (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt, 60323
Germany

Benjamin Loos

Technische Universität München (TUM) - TUM School of Management ( email )

Arcisstr. 21
Munich, D-80290
Germany

Jenny Pirschel

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Johannes Wohlfart

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

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