The trading response of individual investors to local bankruptcies

Authors Laudenbach, Loos, Pirschel, Wohlfart
Journal Journal of Financial Economics
Year 2021
Type Published Paper
Abstract We examine how adverse local experiences that are uninformative of future returns affect households' investment behavior in the short term. Using data from a German online brokerage and a survey we show that retail investors sharply reduce risk taking in response to nearby firm bankruptcies. Adjustments in risk taking occur through immediate and transitory increases in trading, and seem to work through more pessimistic expectations about aggregate stock returns and increased risk aversion. Changes in background risks or wealth effects cannot explain our findings. Extrapolation from local experiences to aggregate expectations is inconsistent with optimal use of full or limited information.
Keywords Individual investors, risk-taking, trading, experiences
URL https://doi.org/10.1016/j.jfineco.2021.06.033
Tags Archival Empirical  |   Asset Pricing, Trading Volume and Market Efficiency  |   Experimental / Survey-Based Empirical  |   Financing- and Investment Decisions (Individual)