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Retail investor trade and the pricing of earnings

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  • Jeremy Michels

    (Purdue University)

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.

Suggested Citation

  • Jeremy Michels, 2025. "Retail investor trade and the pricing of earnings," Review of Accounting Studies, Springer, vol. 30(1), pages 575-610, March.
    • Handle: RePEc:spr:reaccs:v:30:y:2025:i:1:d:10.1007_s11142-024-09825-9
    DOI: 10.1007/s11142-024-09825-9
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    More about this item

    Keywords

    Retail investor; Individual investor; Robinhood; Earnings announcement; Post-earnings-announcement drift;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G50 - Financial Economics - - Household Finance - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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