ARE INDIVIDUAL INVESTORS INFORMED TRADERS? EVIDENCE FROM THEIR MIMICKING BEHAVIOR

Abstract

Evidence from a large stream of research suggests that individual investors are uninformed noise traders, who push equity prices away from fundamentals. Recent studies, however, find that individual investors are sophisticated—their trades contain information about future stock prices. In this study, I shed light on this debate by examining a potential channel through which individual investors become informed: trading disclosures of other market participants. Specifically, I examine whether individual investors exploit the proprietary trading strategies of institutional investors revealed in 13F filings. Using a large sample of retail trades, I find a significant positive association between the order imbalance of retail investors and the first buys of institutional investors around the 13F disclosure deadline, with the positive association concentrated among transient and growth-style institutions. The results suggest that not only do individual investors engage in mimicking trading, but their mimicking behavior is selective. I further find that retail investors’ order imbalance predicts future stock returns, with this predictive ability more pronounced in the week around the 13F disclosure deadline, which suggests that individual investors benefit from their selective mimicking trading. Lastly, I find that mimicking trading accelerates the price discovery of upcoming earnings news. Overall, this study enhances our understanding of how individual investors use public disclosures to become informed and contributes to the debate on whether individual investors are informed traders as well as work on the role of SEC disclosures in leveling the informational playing field.