TY - JOUR

T1 - The trading response of individual investors to local bankruptcies

AU - Laudenbach, Christine

AU - Loos, Benjamin

AU - Pirschel, Jenny

AU - Wohlfart, Johannes

N1 - Funding Information: We would like to thank the editor, Ron Kaniel, and an anonymous referee for thoughtful comments that improved the paper considerably. We are grateful for helpful comments from Tobias Berg, Utpal Bhattacharya, Jonathan Brogaard, Andreas Hackethal, Tobin Hanspal, Zwetelina Iliewa, Heiko Jacobs, Sebastian Müller, Alexandra Niessen-Ruenzi, Chris Roth, Nic Schaub, Sonja Settele, Stephan Siegel, Paul Smeets, Sascha Steffen, Annika Weber, Martin Weber, as well as seminar and conference participants at the Foster School of Business (University of Washington), the University of Mannheim, the University of Maastricht, and the Università Cattolica del Sacro Cuore, the SAFE Household Finance Workshop, the ERIC (Stuttgart), the German Finance Conference (2017), the Research in Behavioral Finance Conference (Amsterdam), and the Swiss Finance Conference (2017). This project was partially funded by the Leibniz Institute for Financial Research SAFE as well as the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) under Germany’s Excellence Strategy—EXC 2126/1- 390838866 . The activities of the Center for Economic Behavior and Inequality (CEBI) are funded by the Danish National Research Foundation . Support from the Danish Finance Institute (DFI) is gratefully acknowledged. The survey instructions can be found at: https://www.dropbox.com/s/cxzvt0kocl34g3e/Bankruptcies_2019_Survey_Instructions.pdf?dl=0 Funding Information: We would like to thank the editor, Ron Kaniel, and an anonymous referee for thoughtful comments that improved the paper considerably. We are grateful for helpful comments from Tobias Berg, Utpal Bhattacharya, Jonathan Brogaard, Andreas Hackethal, Tobin Hanspal, Zwetelina Iliewa, Heiko Jacobs, Sebastian M?ller, Alexandra Niessen-Ruenzi, Chris Roth, Nic Schaub, Sonja Settele, Stephan Siegel, Paul Smeets, Sascha Steffen, Annika Weber, Martin Weber, as well as seminar and conference participants at the Foster School of Business (University of Washington), the University of Mannheim, the University of Maastricht, and the Universit? Cattolica del Sacro Cuore, the SAFE Household Finance Workshop, the ERIC (Stuttgart), the German Finance Conference (2017), the Research in Behavioral Finance Conference (Amsterdam), and the Swiss Finance Conference (2017). This project was partially funded by the Leibniz Institute for Financial Research SAFE as well as the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) under Germany's Excellence Strategy?EXC 2126/1- 390838866. The activities of the Center for Economic Behavior and Inequality (CEBI) are funded by the Danish National Research Foundation. Support from the Danish Finance Institute (DFI) is gratefully acknowledged. The survey instructions can be found at: https://www.dropbox.com/s/cxzvt0kocl34g3e/Bankruptcies_2019_Survey_Instructions.pdf?dl=0 Publisher Copyright: © 2021

PY - 2021/11

Y1 - 2021/11

N2 - 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 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.

AB - 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 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.

KW - Experiences

KW - Individual investors

KW - Risk taking

KW - Trading

U2 - 10.1016/j.jfineco.2021.06.033

DO - 10.1016/j.jfineco.2021.06.033

M3 - Journal article

AN - SCOPUS:85111064377

VL - 142

SP - 928

EP - 953

JO - Journal of Financial Economics

JF - Journal of Financial Economics

SN - 0304-405X

IS - 2

ER -