Earnings Expectations and Investor Clienteles

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Abstract
Prior research suggests that some investors may hold earnings expectations that are biased toward seasonal random walk (SRW) predictions. We provide direct evidence that the net buying activity of small (large) traders around earnings announcements is significantly positively associated with SRW (analyst) forecast errors. Further, after controlling for firm-specific variables, e.g., institutional holding, small-trader activity is positively associated with the importance of SRW forecast errors (relative to analyst forecast errors) in explaining stock returns around earnings announcements. Taken together these results suggest that a specific subset of investors (those implementing small trades) hold systematically biased expectations and affect stock prices.