Retail Investor Trade and the Pricing of Earnings
Review of Accounting Studies, forthcoming
Jacobs Levy Equity Management Center for Quantitative Financial Research Paper
58 Pages Posted: 26 Apr 2021 Last revised: 30 Apr 2024
Date Written: April 9, 2024
Abstract
Using the number of Robinhood users holding a firm’s shares, I examine how novice retail investors respond to earnings announcements and the implications of their responses for the price-earnings relation. I do not find evidence of informed trading among these investors. Changes in their holdings also do not resemble random, uncorrelated noise trading. Instead I find that the number of retail investors holding a firm’s shares increases in response to both more positive and more negative earnings news, consistent with attention-driven trade. While retail trades appear to react to announced earnings, an analysis of intraday trading indicates that these traders respond most consistently to market returns following the earnings announcement, as opposed to only earnings itself. Consistent with this coordinated trading exerting pressure on prices, I find that stock returns drift upward following both the most positive and the most negative earnings surprises when increases in retail holdings are greatest and the firm is relatively small or costly to sell short.
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