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The Power of the Crowd: Retail Investors and the Cost of Capital

Author

Listed:
  • Stephen P. Ferris

    (Ryan College of Business, University of North Texas, United States)

  • Jan Hanousek, Jr.

    (Faculty of Business and Economics, Mendel University in Brno, Czech Republic)

  • Jan Hanousek

    (Fogelman College of Business Economics, University of Memphis, United States)

  • Jolana Stejskalová

    (Faculty of Business and Economics, Mendel University in Brno, Czech Republic)

Abstract

Using a natural experiment based on technical improvements to Google Trends data, we are able to identify the attention of unsophisticated retail investors more clearly and disentangle its impact on equity trading. We find that this trading has a significant negative effect on a firm’s implied cost of capital. Further, we discover that the attention of unsophisticated investors decreases liquidity. These adverse effects of trading by unsophisticated investors are more pronounced for smaller firms with lower institutional ownership. As a remedy, firms respond to the increased trading of unsophisticated investors by reducing the textual complexity of their financial statements.

Suggested Citation

  • Stephen P. Ferris & Jan Hanousek, Jr. & Jan Hanousek & Jolana Stejskalová, 2025. "The Power of the Crowd: Retail Investors and the Cost of Capital," MENDELU Working Papers in Business and Economics 2025-105, Mendel University in Brno, Faculty of Business and Economics.
    • Handle: RePEc:men:wpaper:105_2025
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    More about this item

    Keywords

    retail investors; investor attention; cost of capital; trading; sophistication; earnings complexity;
    All these keywords.

    JEL classification:

    • 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

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