The trading response of individual investors to local bankruptcies

Abstract

We use data from a German online brokerage and a survey to show that retail investors sharply reduce risk-taking in response to nearby firm bankruptcies, which are not predictive of returns. The e↵ects on trading are spatially highly concentrated, immediate and not persistent. They seem to operate through more pessimistic expected returns and increased risk aversion and do not reflect wealth e↵ects or changes in background risks. Investors learn about bankruptcies through immediate coverage in local newspapers. Our findings suggest that non-informative local experiences that make downside risks of stock investment more salient contribute to idiosyncratic short-term fluctuations in trading.

Income and Wealth Shocks and Expectations during the COVID-19 Pandemic

“…The patterns are less pronounced for experiences during the earlier stock market crashes following the burst of the Dot-com bubble in 2000 or the Black Monday in 1987. These findings are in line with recency bias documented by the literature on the role of experiences in financial risk-taking (Andersen et al, 2019;Laudenbach et al, 2020;Malmendier and Nagel, 2011), and suggest that losing wealth during a stock market crash may have the negative long-run consequence of a greater tendency to sell stocks following market downturns. Finally, men are more likely to make adjustments to their portfolios, but there are no patterns according to education or political a liation.…”

Economic Preferences during a Global Crisis: Evidence from Wuhan

“…One challenge of this literature, is that in the absence of individuals' forecasts, holding less risky assets may reflect high risk aversion or pessimistic expectations about the future (Malmendier and Nagel, 2011;Cohn et al, 2015). Disentangling these underlying mechanisms are a challenge and a number of studies find evidence of a beliefbased channel (Malmendier and Nagel, 2011;Koudijs and Voth, 2016;Kuhnen and Knutson, 2011;Laudenbach et al, 2020), while others find support for a preference based channel (Knuston et al, 2008;Cohn et al, 2015). We contribute to this literature by providing evidence that aggregate shocks can affect general preferences and economic expectations, while heterogeneity in exposure, can acutely, further affect risk taking through beliefs about individual outcomes such as luck and sense of control.…”

Entrepreneurial Wealth and Employment: Tracing Out the Effects of a Stock Market Crash

“…34 It is conceptually challenging to disentangle the ability and risk-tolerance channels. Owners may suffer sizable losses in the stock market, but still have some liquid wealth left that they nevertheless are unwilling to allocate to the 34 For example, Kuchler and Zafar (2019) show that idiosyncratic, personal experiences affect expectations about aggregate outcomes, Adelino, Schoar, and Severino (2018) show that local house price shocks affect the perceived riskiness of housing, Andersen, Hanspal, and Nielsen (2019) show that negative personal shocks affected risk taking during the financial crisis, Guiso, Sapienza, and Zingales (2018) find that the financial crisis increased individuals' risk aversion, Pool et al (2019) find that house price shocks affect fund managers' decisions, Laudenbach et al (2021) find that uninformative local economic shocks affect trading behavior through a belief rather than wealth effect, and Kaustia and Knüpfer (2008) show that individually experienced past returns affect the propensity to subscribe to future IPOs. firm due to decreased risk tolerance.…”