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Individual Investor Trading And Return Patterns Around Earnings Announcements

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Executive Summary

This paper investigates the behavior of individual investors around earnings announcements using a unique dataset of NYSE stocks. The authors find that intense individual buying (selling) prior to the announcement is associated with significant positive (negative) abnormal returns in the three months following the event. Compensation for risk-averse liquidity provision seems to account for approximately half of the abnormal return, but a significant component remains that could be due to private information or skill. They also examine the behavior of individuals after the earnings announcement and find that they trade in the opposite direction to both pre-event returns (i.e., exhibit "Contrarian" behavior) and the earnings surprise (i.e., exhibit "News-contrarian" behavior).

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