Individual investors and financial disclosure

Abstract

Using detailed data of individual investors, this dissertation investigates whether and how individuals use financial disclosure and analysts' signals. Chapter 1 shows that, on average, individuals invest more in firms with readable, concise, and transparent financial disclosures.The results indicate that these relations are less pronounced for overconfident investors, and that individual investors appear to place a greater weighting on such financial disclosure attributes relative to institutional investors. In supplementary analyses, I further examine cross-sectional variations among individuals in their use of disclosure, and find two main subgroups that do not display a preference for accessible and transparent disclosures. The first subgroup is speculative investors, whose investment strategies rely on conjecture rather than knowledge, and the second subgroup is financially literate investors, those with lower information processing costs. These findings support the notion that more accessible and transparent disclosures are used by those individuals who need them the most: i.e., the average American. Lastly, I examine whether individuals' investment performance varies with financial disclosure attributes and show that individuals' returns are, on average, increasing in firms with more accessible and transparent disclosures.iii Chapter 2 examines how individuals react to revisions in analysts' recommendations and earnings forecasts. First, the analyses show that individuals' abnormal trading activity increases by 30 percent in response to analysts' recommendation revisions and by 15 percent in response to analysts' earnings forecast revisions. Second, the analyses indicate that 47 percent of individuals trade consistently with analyst guidance and 53 percent trade contrarian to analysts' guidance, which opposes the belief that individuals are a homogenous group of investors. The contrarian behavior is most common in response to analyst downgrades (i.e., purchasing after downgrades) and is most evident among individuals with better prior performance, individuals who trade infrequently, men, and older individuals. Lastly, the study provides evidence suggesting that trading contrarian to analysts is in general hazardous to individuals' financial health. Taken together, the results indicate that individuals respond to analyst guidance and that individuals' use of analyst guidance varies significantly with respect to their personal attributes.iv ACKNOWLEDGMENTS

Exploring Determinants to Explain Aspects of Individual Investors’ Financial Behaviour

“…The study by Lawrence (2013) revealed that higher quality financial disclosures by firms encourage individuals to risk and invest more. The importance of information access has also been confirmed by examining insiders who have access to relevant information about the firm's performance, in a study by Van Geyt et al (2013), shows that insiders benefit from inside information during financial crisis trading, and which resulted in higher profits.…”

Short and Sweet or Just Short? The Readability of Product Disclosure Statements

“…Miller (2010) finds that retail investors trade fewer shares in firms with less readable and larger annual reports, while Lawrence (2013) finds that small investors invest more in firms with more readable and shorter annual reports. Analysts are also impacted by the readability of annual reports.…”

Who Uses Financial Reports and for What Purpose? Evidence from Capital Providers

“…Finally, Chiyachantana, Jiang, Taechapiroontong and Wood (2004) find that retail trading increased relative to institutional trading around earnings announcements after Regulation Fair Disclosure was introduced in the US, consistent with retail investors abstaining from trading when they fear institutional investors have better information. Similarly, Lawrence (2013) provides evidence based on brokerage data that retail investors invest more and obtain higher returns in firms with more detailed and more readable annual reports and that these associations are less pronounced for investors with a professional background.…”