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The Trading Response of Individual Investors to Local Bankruptcies

Author

Listed:
  • Christine Laudenbach

    (House of Finance, Goethe University, Frankfurt)

  • Benjamin Loos

    (University of Technology, Sidney)

  • Jenny Pirschl

    (Goethe University, Frankfurt)

  • Johannes Wohlfart

    (CEBI, Department of Economics, University of Copenhagen)

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 e ects 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 e ects 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 uctuations in trading.

Suggested Citation

  • Christine Laudenbach & Benjamin Loos & Jenny Pirschl & Johannes Wohlfart, 2020. "The Trading Response of Individual Investors to Local Bankruptcies," CEBI working paper series 20-08, University of Copenhagen. Department of Economics. The Center for Economic Behavior and Inequality (CEBI).
    • Handle: RePEc:kud:kucebi:2008
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    File URL: https://www.econ.ku.dk/cebi/publikationer/working-papers/CEBI_WP_08-20.pdf
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    More about this item

    Keywords

    Individual investors; risk-taking; trading; experiences;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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