The Wisdom of Crowds and the Market’s Response to Earnings News: Evidence From the Geographic Dispersion of Investors
64 Pages Posted: 16 Nov 2018 Last revised: 12 Dec 2022
Date Written: November 7, 2022
Abstract
The wisdom of crowds suggests that groups with more diversely informed individuals reach more informed decisions because their members are collectively more knowledgeable. I study this idea in the context of the market’s response to earnings announcements by examining how information diversity across investors affects the efficiency of the price response to earnings news. I measure investors’ information diversity based on their geographic dispersion, which I estimate using the locations of the requests for firms’ filings to EDGAR. Greater geographic dispersion is associated with greater trading during the announcement period; this supports the use of geographic dispersion as a measure of information diversity. Consistent with my predictions, the price response to a firm’s earnings news is more efficient when the firm’s investors have greater information diversity. In further analysis, I find that the initial heightened trading for firms with more diversely informed investors subsides quickly after the announcement period.
Keywords: diversely informed investors, earnings announcements, EDGAR, geography, location
JEL Classification: G12, G14, D83
Suggested Citation: Suggested Citation