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Why everyday investors trade on past trends over new accounting info

Elizabeth Blankespoor

Elizabeth Blankespoor

“Past performance is no guarantee of future results.”

This familiar disclaimer—a cautionary mantra of every mutual fund prospectus and investment disclosure—often goes unheeded by casual investors who nevertheless trade on historic stock returns rather than new accounting information.

Why is this?

A new study out of the University of Washington Foster School of Business identifies several barriers that can prevent investors from incorporating the insights of financial reports into their investing decisions.

The first barriers are simply knowing that accounting information is publicly available and where to find it, according to co-authors Elizabeth Blankespoor and Ed deHaan, associate professors of accounting at the Foster School, Foster doctoral student John Wertz, and Christina Zhu of the University of Pennsylvania Wharton School.

But even when the researchers removed those barriers—by providing a simple media article that reports both current earnings news and past stock returns for a given company—investors still acted on old stock return trends.

Ed deHaan

Ed deHaan

“Although these investors had earnings information readily available, we find no evidence that their trades incorporate it,” says deHaan, a Michael G. Foster Faculty Fellow. “Instead, we find that their trading responds to the trailing stock returns presented in the articles.”

This appears to be due to a third, most-prohibitive barrier: everyday investors lack the skills necessary to evaluate and use accounting information to make smart trading decisions.

“Our findings suggest that the costs of monitoring and acquiring accounting reports are not the primary barriers to unsophisticated investors’ use of accounting information,” says Blankespoor, a Reimers Endowed Faculty Fellow. “Rather, the likely obstacles are lack of training, behavioral biases—or both.”

Why Do Individual Investors Disregard Accounting Information? The roles of Information Awareness and Acquisition Costs” was published in the March 2019 Journal of Accounting Research.