The Disparate Effects of Non-Reliance Restatements on Retail and Institutional Investor Trading

The SEC seeks to mandate disclosures that effectively inform retail investor decision making. To evaluate these efforts, I investigate how retail investors, relative to institutional investors, process non-reliance restatements. I find that both retail and institutional investors revise expectations about firm value and modify investment decisions following these disclosures. However, in contrast to regulator efforts, the results suggest that the costs to process non-reliance restatements are disproportionately high for retail investors. Specifically, individuals tend to disagree regarding the implications of these disclosures for firm value, whereas institutions tend to draw similar inferences. Moreover, individuals take significantly longer than institutions to fully modify their investment holdings. Cross-sectional tests reveal that a strong information environment can mitigate these disparate effects and that individuals process restatements more effectively when the underlying misstatement is common among industry peers. Collectively, this study provides valuable insights for academics, regulators, and practitioners regarding retail investors’ ability to process an important accounting disclosure.