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Why do individual investors disregard accounting information? The roles of information awareness and acquisition costs

Elizabeth Blankespoor (Foster School of Business), Ed deHaan (Foster School of Business), John Wertz (Foster School of Business) and Christina Zhu (The Wharton School, University of Pennsylvania) investigate the information frictions that impede retail investors’ use of accounting information. They focus on investors’ costs of monitoring and acquiring accounting disclosures, by using an archival setting in the United States in which individuals are presented with automated media articles that report both current earnings news and past stock returns.

They find no evidence that retail investors use these automated media articles to trade on earnings news, but instead find that investors trade in response to the trailing stock returns (i.e., momentum) listed at the bottom of each article.

These findings indicate that many retail investors disregard earnings information even when it is readily available, indicating that awareness and acquisition costs are not the primary barriers to their use of accounting information. Rather, one likely reason that individual investors disregard accounting information is the high cost of understanding how to use earnings in valuation models. The study concludes that, by themselves, regulations designed to reduce the costs of monitoring and acquiring accounting information are unlikely to help many retail investors.

Read full paper “Why do individual investors disregard accounting information? The roles of information awareness and acquisition costs” by Elizabeth Blankespoor, Ed deHaan, John Wertz, and Christina Zhu, Journal of Accounting Research (Volume 57, Issue1 March 2019 Pages 53-84) at SSRN.

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CFRA aims to provide an effective contribution to scientific research and practice-oriented, pragmatic transfer of knowledge on financial reporting and auditing, as well as financial management more generally. In our Right on the money series, we share easy-to-understand summaries of emerging research in the field. For more information visit CFRA's Website and LinkedIn.

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