Did Retail Investors Bull the Market?

Abstract

Retail investors have been viewed as noise traders by academics for decades. This article provides a fresh perspective on the effect of an increasing number of new retail investors joining the stock market on asset prices at the market level. By applying the empirical framework for post-earnings-announcement drift, we construct a detrend retail investor participation measure using the residual orthogonalization method. This analysis results in new evidence that when retail brokerage accounts increase after earnings announcements, it creates a boost in short term cumulative abnormal returns (CARs). If the past stock market does not have a persistence price pattern, an increase in the number of retail brokerage accounts following such an anti-persistence market does not impact CARs. Further, we find that the effect of excess retail accounts on CARs is statistically significant for the positive earnings news group of stocks.