Retail Investors' Contrarian Behavior Around Earnings, Attention, and the Momentum Effect

By: Marco Sammon, Cheng (Patrick) Luo, Enrichetta Ravina and Luis M. Viceira

Format:Print
| Language:English

Abstract

We study the role of retail investors in the gradual diffusion of information in financial markets. We show that retail investors tend to trade as contrarians after large earnings surprises, and such contrarian trading contributes to sluggish price adjustment and to momentum. Retail traders are particularly active for small loser stocks. As a robustness check, we double sort stocks in quintiles based on momentum and the strength of retail contrarian trading, and find that the momentum phenomenon arises only in the 4th and 5th quintile of contrarian trading intensity. We further investigate the timing and the horizon of the traders, the role of segmentation in stock ownership, and the role of attention and browsing behavior in generating contrarian trading. Alternative hypotheses, such as the disposition effect, and stale limit orders, do not explain the phenomenon.