Retail investors and the pricing of accounting information: evidence from brokerage website outages

Recent price volatility attributed to retail investors has stoked interest from the media, academics, and regulators on the behavior of these investors. However, there is little consensus in prior research on how retail investors contribute to the stock market. I contribute to this literature by examining the effect of retail investors (i.e., individual traders on the stock market whose trades are not affiliated with large institutions such as banks, hedge funds, etc.) on price movement around earnings announcements using a unique setting. In recent years, most retail investors trade via online trading platforms provided by large brokerage firms such as Fidelity and Charles Schwab. Using website outages on these platforms to identify times in which a portion of retail investors are unable to trade, I find that retail investors help price earnings announcement information into the stock market, particularly for firms with fewer professional institutional investors. In addition, I find that retail investors using larger, more established brokerage firms are better at incorporating earnings news into the market than those using newer brokerage firms to trade. In summary, my results suggest that retail investors play an important role in facilitating efficient stock market prices.