Accounting Standard Updates and Retail Trading Activity

Abstract

This paper investigates the differential effect of Accounting Standards Updates (ASUs) on retail vs. institutional trading activity around earnings announcements. Using a set of 47 individual ASUs, I find that on average, the issuance of an ASU leads to a decrease in trading volume and an increase in bid-ask spread surrounding earnings announcements. The decrease in trading volume is greater for retail investors than institutional investors, indicating that ASUs may alter financial reports in such a way that retail investors are disadvantaged. Additionally, the relation between stock price movements and retail buy-sell imbalances becomes weaker after the issuance of an ASU, indicating that retail trades become less connected to measures of fundamental value. However, ASUs that were issued with the intent to either decrease complexity surrounding financial reporting or increase financial statement comparability show these effects mitigated. My findings provide insights into how accounting updates influence investor behavior, market dynamics, and the flow of information, offering implications for policy makers to consider as they issue new standard updates.