Why Do Individual Investors Disregard Accounting Information? The Roles of Information Awareness and Acquisition Costs

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Abstract

Individual investors often fail to incorporate value-relevant accounting information into trading decisions, and instead tend to underperform by trading on attention-grabbing technical trends. Many SEC regulations attempt to help individuals make better-informed trading decisions by decreasing their costs of monitoring and acquiring firms’ accounting disclosures. We examine whether information awareness and acquisition costs are responsible for individual investors’ neglect of accounting information. We do so using a unique archival setting where individual investors are presented with automated media articles that report both current earnings announcement news and trailing stock returns. Although these investors have value-relevant earnings surprise information readily at hand, we find no evidence that their trades incorporate earnings news. Instead we find that they trade in response to the trailing stock returns presented in the articles. Our study raises questions about the likely efficacy of regulations that aim to aid individual investors by increasing their awareness of, and access to, accounting information.

Authors

• Elizabeth Blankespoor, Stanford University

• Ed deHaan, University of Washington

• John Wertz, University of Washington

• Christina Zhu, Stanford University