How Wise Are Crowds? Insights from Retail Orders and Stock Returns




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    • Kelley is at University of Arizona and Tetlock is at Columbia University. The authors thank the following people for their helpful comments: Brad Barber, Robert Battalio, Ekkehart Boehmer, Kent Daniel, Stefano DellaVigna, Simon Gervais, Campbell Harvey, Paul Irvine, Charles Jones, Tim Loughran, Terry Odean, Emiliano Pagnotta, Chris Parsons, Mitchell Petersen, Tano Santos, Nitish Sinha, Sheridan Titman, Scott Weisbenner, and an anonymous Associate Editor and referee, along with participants at the Miami Finance, NYU Five-Star, and WFA conferences, as well as colleagues at Alberta, AQR Capital, Arizona, Columbia, DePaul, Emory, LBS, LSE, Texas A&M, and USC. The authors also thank the University of Arizona and Columbia, respectively, for research support, Travis Box for research assistance, and Dow Jones for access to their news archive. All results and interpretations are the authors’ and are not endorsed by the news or retail order data providers.


We analyze the role of retail investors in stock pricing using a database uniquely suited for this purpose. The data allow us to address selection bias concerns and to separately examine aggressive (market) and passive (limit) orders. Both aggressive and passive net buying positively predict firms’ monthly stock returns with no evidence of return reversal. Only aggressive orders correctly predict firm news, including earnings surprises, suggesting they convey novel cash flow information. Only passive net buying follows negative returns, consistent with traders providing liquidity and benefiting from the reversal of transitory price movements. These actions contribute to market efficiency.