This article has been reviewed according to Science X's editorial process and policies. Editors have highlighted the following attributes while ensuring the content's credibility: Why are individual investors, commonly known as "retail investors," prone to losing money in the stock market? A Lingnan University joint study of more than 4,600 Chinese and U.S. stocks finds that investors are less likely to buy stocks blindly when they understand the difference between a company's "reported earnings" and its "actual cash flows." The research team used social media to explain the difference between the two and teach investors how to analyze relevant company data.
The results show that, for companies whose earnings contain a larger accrual component, the buying behavior of retail investors who received the relevant education declined significantly. Investment losses arising from stock prices rising and then falling after an earnings announcement were also reduced. These findings were recently published in the Journal of Accounting and Economics (JAE).
The research team, comprising Zhao Xiaofeng, an associate professor in the Department of Finance at Lingnan University, and scholars from Henan University and The Chinese University of Hong Kong, Shenzhen, examined 2,284 publicly listed Chinese stocks and 2,387 U.S. stocks. They created a dedicated investment education website and set up a separate page for each stock, providing learning resources on the basic concepts of "reported earnings" and "actual cash flows," as well as methods for calculating and analyzing the data. The research team then divided the stocks into four random groups and, about 19 days before the companies announced their earnings, published relevant content through Weibo, Xueqiu, Guba on EASTMONEY, X and Stocktwits.
One group received information about the upcoming earnings announcements together with basic concepts of "reported earnings" and "actual cash flows." Another group was given the basic concepts as well as practical instructions on how to calculate and analyze the data, including the use of tools to analyze companies' accruals. The third group received only information about the upcoming earnings announcements, without any investment learning resources, and served as a control group. The fourth group received no related information and also served as a comparison.
More than 30 million views were recorded across all social media platforms. The research team then compared changes in stock prices before and after earnings announcements across the four groups, as well as retail investors' buying and selling behavior. Previous research had found that investors place too much weight on "reported earnings," and when they buy the relevant stocks, this results in a larger increase in prices after an earnings announcement, followed by a subsequent reversal.
The team therefore conducted a targeted test to examine whether this pattern would change when investors understood the relevant accounting concepts and analytical methods. The results show that guidance providing only basic accounting concepts did not significantly reduce the tendency for stock prices to rise and then fall following an earnings announcement. By contrast, education combining basic concepts with practical analytical methods produced a stronger effect.
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