The Retail Habitat

Abstract

Retail investors trade hard-to-value stocks. We document a large and persistent spread in the stock-level intensity of retail trading, even allowing for known biases in the attribution of retail trades. Stocks with a high share of retail-initiated trades are composed of more intangible capital, have longer duration cash-flows and a higher likelihood of being mispriced. Consistent with retail-heavy stocks being harder to value, we document that such stocks are less sensitive to earnings news, more sensitive to retail order flow and are particularly expensive to trade around earnings announcements. Overall, our findings document a new dimension of investor heterogeneity and suggest a comparative advantage of retail in trading hard-to-value stocks.

Keywords: retail investors, retail heterogeneity, earnings announcer premium

JEL Classification: G11, G14