Retail investor attention and equity mispricing: The mediating role of earnings management

Abstract

This study examines the relationship between abnormal retail investor attention and equity mispricing in investors’ target firms. Employing a sample of Chinese listed firms from 2013 to 2021, we find that abnormal retail investor attention, measured by Baidu search volume, has a significantly positive effect on such equity mispricing. Compared with underpricing, the positive relationship between abnormal retail investor attention and overpricing is more significant, with earnings management playing a mediating role in these effects. These findings also hold after controlling for potential endogenous effects. Further analyses show that the positive effect of abnormal retail investor attention on mispricing exists only for firms that are non-state-owned enterprises, have high executive equity incentives, and face lax external audits.