Educating retail investors to understand companies’ actual cash flows can effectively curb blind stock buying

Why are individual investors, commonly known as retail investors, prone to losing money in the stock market? A Lingnan University joint study of more than 4,600 Chinese and US stocks finds that investors are less likely to buy stocks blindly when they understand the difference between a company’s “reported earnings” and its “actual cash flows”. The research team used social media to explain the difference between the two, and to teach investors how to analyse relevant company data. The results show that for companies whose earnings contain a larger accrual component, the buying behaviour of retail investors who received the relevant education declined significantly. Investment losses arising from stock prices rising and then falling after an earnings announcement were also reduced. These findings were published in the leading international Journal of Accounting and Economics.

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