The Informational Role of Individual Investors in Stock Pricing: Evidence from Large Individual and Small Retail Investors

Abstract

Using a unique data set of complete trade records, we find that large individual investors are successful at picking stocks. Large individual investors’ correlated trades not only can move synchronous stock prices but also can positively predict future returns. More importantly, large individual investors tend to trade before major earnings announcements and large price changes, suggesting that they are able to exploit value-relevant information. In contrast to large individual investors, small retail investors’ correlated trades are inversely associated with synchronous and future stock returns, indicating that small retail investors are uninformed and naive. The differential information content between large individual and small retail investors highlights the need to classify individual investors according to their investment amount when examining their role in stock pricing.