The Power of the Crowd: Retail Investors and the Cost of Capital

Stephen P. Ferris (), Jan Hanousek (), Jan Hanousek () and Jolana Stejskalová
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Stephen P. Ferris: Ryan College of Business, University of North Texas, United States
Jan Hanousek: Faculty of Business and Economics, Mendel University in Brno, Czech Republic
Jan Hanousek: Fogelman College of Business Economics, University of Memphis, United States
Authors registered in the RePEc Author Service: Jan Hanousek Jr. () and Jan Hanousek

No 2025-105, MENDELU Working Papers in Business and Economics from Mendel University in Brno, Faculty of Business and Economics

Abstract: Using a natural experiment based on technical improvements to Google Trends data, we are able to identify the attention of unsophisticated retail investors more clearly and disentangle its impact on equity trading. We find that this trading has a significant negative effect on a firm’s implied cost of capital. Further, we discover that the attention of unsophisticated investors decreases liquidity. These adverse effects of trading by unsophisticated investors are more pronounced for smaller firms with lower institutional ownership. As a remedy, firms respond to the increased trading of unsophisticated investors by reducing the textual complexity of their financial statements.

Keywords: retail investors; investor attention; cost of capital; trading; sophistication; earnings complexity (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Pages: 45
Date: 2025-05
New Economics Papers: this item is included in nep-mst
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