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.
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.
| Identifer | oai:union.ndltd.org:TORONTO/oai:tspace.library.utoronto.ca:1807/31827 |
| Date | 10 January 2012 |
| Creators | Lawrence, Alastair |
| Contributors | Hope, Ole-Kristian |
| Source Sets | University of Toronto |
| Language | en_ca |
| Detected Language | English |
| Type | Thesis |
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