Retail Investor Trading and Market Reactions to Earnings Announcements

Abstract

This paper uses holdings and outage data from Robinhood and transaction-level data from U.S. exchanges to examine how retail investors affect the pricing of public earnings information. We find that retail trader activity is associated with prices that are more responsive to earnings surprises, and earnings announcements affected by seemingly random retail trading outages experience weaker price responses. These results are concentrated in firms that are smaller and have less robust informational environments. Additional evidence shows that the retail activity is associated with more volatile returns during the earnings announcement window, which can slow the incorporation of public information and contribute to larger bid-ask spreads. Overall, our results suggest that retail investors can facilitate the incorporation of public information into price over the 2-day earnings announcement window despite the potential to increase volatility and impose risk on other market participants.