Retail Investor Trade and the Pricing of Earnings
47 Pages Posted: 26 Apr 2021 Last revised: 28 Mar 2022
Date Written: March 22, 2022
New technologies have reduced trading costs for retail investors. In this paper, I examine how the corresponding surge in retail investor trade, measured using the number of Robinhood users holding a firm’s shares, is associated with the pricing of earnings. I do not find evidence of informed trade among these investors, as increased holdings pre-earnings announcement predict more negative earnings news. At the earnings announcement, I find that retail investors increase holdings in response to both more positive and more negative earnings news, consistent with attention-driven trade. This manifests in a more pronounced overall market response per unit of earnings surprise, a result driven by positive earnings surprises. Finally, in smaller firms and firms that are costly to sell short, and for both the most positive and negative earnings surprises, returns drift upward following the earnings announcement when retail trade is high.
Keywords: Retail investor, individual investor, Robinhood, earnings announcement, post-earnings-announcement drift
JEL Classification: G10, G11, G12, G14, G24, G41, G50, M41, O33
Suggested Citation: Suggested Citation