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How Wise Are Crowds? Insights from Retail Orders and Stock Returns
Author(s) -
KELLEY ERIC K.,
TETLOCK PAUL C.
Publication year - 2013
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12028
Subject(s) - stock (firearms) , crowds , market liquidity , cash flow , earnings , business , market efficiency , financial economics , economics , econometrics , monetary economics , finance , computer science , mechanical engineering , computer security , engineering
ABSTRACT We analyze the role of retail investors in stock pricing using a database uniquely suited for this purpose. The data allow us to address selection bias concerns and to separately examine aggressive (market) and passive (limit) orders. Both aggressive and passive net buying positively predict firms’ monthly stock returns with no evidence of return reversal. Only aggressive orders correctly predict firm news, including earnings surprises, suggesting they convey novel cash flow information. Only passive net buying follows negative returns, consistent with traders providing liquidity and benefiting from the reversal of transitory price movements. These actions contribute to market efficiency.