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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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    2. Tang, Lin & Zhuo, Zhi & Zou, Hong, 2025. "When expectations of implicit government guarantees diminished, do retail stock investors run away?," Journal of Banking & Finance, Elsevier, vol. 175(C).
    3. Huang, Xiaowei & Cheng, Ge & Zhang, Man, 2025. "Climate change risk and real estate prices—Micro evidence from coastal cities in China," Pacific-Basin Finance Journal, Elsevier, vol. 90(C).
    4. Bernard, Sabine & Loos, Benjamin & Weber, Martin, 2021. "The disposition effect in boom and bust markets," SAFE Working Paper Series 305, Leibniz Institute for Financial Research SAFE.
    5. Benjamin Christoffersen & Arvid Hoffmann & Zwetelina Iliewa & Lena Jaroszek, 2025. "Experience Effects on Wall Street vs. Main Street: Field and Lab Evidence of Context Dependence," CRC TR 224 Discussion Paper Series crctr224_2025_684, University of Bonn and University of Mannheim, Germany.
    6. Laura Serra & Claudio Detotto & Pablo Juan & Marco Vannini, 2022. "Intersectoral and spatial spill-overs of firms’ bankruptcy in Spain," Letters in Spatial and Resource Sciences, Springer, vol. 15(2), pages 197-211, August.
    7. Bernard, Sabine Esther & Weber, Martin & Loos, Benjamin, 2023. "How speculative asset characteristics shape retail investors' selling behavior," SAFE Working Paper Series 378, Leibniz Institute for Financial Research SAFE.
    8. Laudenbach, Christine & Malmendier, Ulrike M. & Niessen-Ruenzi, Alexandra, 2020. "The Long-lasting Effects of Experiencing Communism on Attitudes towards Financial Markets," CEPR Discussion Papers 14939, Centre for Economic Policy Research.
    9. Hornuf, Lars & Momtaz, Paul P. & Nam, Rachel J. & Yuan, Ye, 2025. "Cybercrime on the ethereum blockchain," Journal of Banking & Finance, Elsevier, vol. 175(C).
    10. Yuan, Hongmin & Ouyang, Yanmin & Li, Yuxiang, 2024. "Local earthquakes and households’ risk-taking: Evidence from the China Household Finance Survey," Journal of Asian Economics, Elsevier, vol. 91(C).
    11. Rex Wang Renjie & Patrick Verwijmeren, 2026. "Cross-Extrapolative Beliefs: Evidence from Equity Analysts," Management Science, INFORMS, vol. 72(4), pages 3128-3146, April.
    12. Chen, Xing & Huang, Zhijian (James) & Li, Zhuo & Wen, Fenghua, 2025. "Impact from a distance: Emotionally attached-place disasters and corporate risk-taking," Journal of Corporate Finance, Elsevier, vol. 93(C).
    13. Kiesl-Reiter, Sarah, 2024. "Subjective Expectations about Joint Return Distributions," VfS Annual Conference 2024 (Berlin): Upcoming Labor Market Challenges 302423, Verein für Socialpolitik / German Economic Association.
    14. Brückbauer, Frank & Schröder, Michael, 2021. "Data resource profile: The ZEW FMS dataset," ZEW Discussion Papers 21-100, ZEW - Leibniz Centre for European Economic Research.
    15. Vacca, Matteo, 2024. "Panic herding: Analysts' COVID-19 experiences and the interpretation of earnings news," Journal of Economics and Business, Elsevier, vol. 132(C).
    16. Tobin Hanspal & Annika Weber & Johannes Wohlfart, 2021. "Exposure to the COVID-19 Stock Market Crash and Its Effect on Household Expectations," The Review of Economics and Statistics, MIT Press, vol. 103(5), pages 994-1010, December.
    17. Gregor Dorfleitner & Lars Hornuf & Martina Weber, 2023. "Paralyzed by shock: the portfolio formation behavior of peer-to-business lending investors," Review of Managerial Science, Springer, vol. 17(3), pages 1037-1073, April.
    18. Bu, Di & Hanspal, Tobin & Liao, Yin & Liu, Yong, 2021. "Risk taking, preferences, and beliefs: Evidence from Wuhan," SAFE Working Paper Series 301, Leibniz Institute for Financial Research SAFE.
    19. Shenghao Gao & Xinyu Li & Siyang Tian & Qi Zhang, 2026. "Investors’ Natural Disaster Experience and Cost of Raising Equity Capital: Evidence From Seasoned Equity Offering Pricing," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 53(2), pages 1053-1076, April.

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    Keywords

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    JEL classification:

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

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