Retail Investor Trade and the Pricing of Earnings

Abstract

New technologies have reduced trading costs for retail investors. In this paper, I examine how the corresponding surge in retail investor trade is associated with the pricing of earnings. I measure retail investor trade with the number of Robinhood users holding a firm’s shares. I find increases in these relatively inexperienced investors are associated with a more positive market response to both positive and negative earnings surprises. This manifests in a more pronounced overall market response per unit of earnings surprise for positive earnings surprises but a muted market response for negative earnings surprises. Further intraday analysis suggests that retail investors respond to stock returns following the earnings announcement instead of the earnings news itself. Finally, in smaller firms and firms that are costly to sell short, and for both the most positive and negative earnings surprises, returns drift upward following the earnings announcement when retail trade is high.