Retail Investors’ Contrarian Behavior Around News, Attention, and the Momentum Effect
Using a large and representative panel of U.S. brokerage accounts, we show that retail investors trade as contrarians after large earnings surprises, especially for loser stocks, and that such contrarian trading contributes to price momentum and post earnings announcement drift (PEAD). We show that extreme return streaks and surprises are not enough for stocks to exhibit PEAD and momentum and that the intensity of contrarian retail trading plays a key role: the PEAD of loser stocks with bad earnings surprises becomes increasingly more negative as retail buying pressure increases, and he PEAD of the stocks with the highest past returns and largest earnings surprises is the most positive for the stocks with the biggest net retail outflow. Finer sorts confirm the results, as do sorts by firm size and institutional ownership level. Younger and more attentive individuals are more likely to be contrarian, and a firm’s dividend yield, leverage, size, book to market, and analyst coverage are associated with the fraction of contrarian trades they face around earnings announcements. The disposition effect and stale limit orders, while present in our sample, do not explain our results. Our findings are consistent with investors’ conservatism, sticky beliefs, and cognitive uncertainty, as well as an incorrect belief in the Law of Small Numbers.
Related
Programs
Working Groups
More from the NBER
In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Retirement and Disability, the Bulletin on Health, and the Bulletin on Entrepreneurship — as well as online conference reports, video lectures, and interviews.
