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Add as preferred source Do you manage your own investments, buying and selling stocks and obsessively checking the earnings reports of the companies in which you invest?
Your attention may have an unintended consequence: it could encourage company managers to be less honest in reporting their firms' earnings, according to Lei Gao, associate professor of finance at Costello College of Business at George Mason University.
Gao's paper in the Journal of Behavioral and Experimental Finance , co-authored by Zhongdong Chen and Brett Olsen of the University of Northern Iowa, investigates how attention from retail investors influences corporate financial reporting. The researchers used the monthly Google Search Volume Index to capture retail investors' fact-finding efforts concerning 1,710 publicly listed U.S. firms from 2004 to 2020.
They also analyzed Compustat financial data for these firms over the same observation period, gauging levels of accrual-based and real earnings management—that is, the tricks managers can pull to manipulate earnings numbers and generate positive headlines.
The researchers found that greater attention from retail investors encouraged managers to manipulate earnings to avoid disappointing the market. A one-standard-deviation increase in retail investor attention corresponded to approximately $1.7 million in additional quarterly real earnings management for the median-sized focal firm.
These results suggest that as retail investors research firms on Google to become more informed, managers at those firms are presumably monitoring Google search volume data (and possibly other sources) to gauge the level of scrutiny they're under from non-insiders.
"Managers know that less sophisticated investors might think the sky is falling if they miss their earnings target by a little bit," Gao explains. The "unsophisticated" trading behavior by retail investors, who cannot analyze the underlying quality of earnings, is often driven by knee-jerk reactions to simple earnings signals, such as attention-grabbing announcements about firms either falling short of or exceeding analysts' earnings predictions.
Gao reasons that managers are incentivized by the growing influence of retail investors to manipulate reported earnings to meet or beat benchmarks because their compensation is tied to the company's financial performance and stock price.
This is especially true for smaller firms, according to Gao's findings. By contrast, at larger firms, investor attention reduces certain types of earnings management. He reckons this is because "large firms are followed by more investors, more market participants"—in other words, more market-savvy actors who would detect earnings management and perhaps draw conclusions unfavorable to the company.
Additionally, Gao, whose previous experience includes working as a financial economist at the U.S. Securities and Exchange Commission (SEC), conjectures that "SEC attorneys are evaluated based on the value of the adjustments they identify in the cases they pursue. Their promotions and salaries increase as a result." Therefore, regulators are focused on bigger fish, leaving the smaller fry freer to manipulate earnings under the dull but watchful gaze of curious retail investors.
But engaging in real earnings management practices—such as offering discounts to boost sales before the end of the quarter, increasing production, and cutting expenses—can have serious consequences. "We cannot call it fraud, but it is an inappropriate practice that could potentially reduce the value of retail investors' holdings over the long run," he clarifies. "Research shows that real earnings management can do damage by allocating funds inefficiently to get a better number this quarter or this year, to the detriment of long-term growth."
Gao's recommendation to retail investors is to interpret headline earnings numbers cautiously and avoid buying stock based solely on analysts' forecasts. "You should be especially suspicious if a firm is consistently slightly exceeding expectations. It could be a sign that the managers are engaging in earnings management," he cautions.
Gao suggests that retail investors need to be educated, "or perhaps you should entrust your money to institutional investors, who have resources to ensure that the companies they invest in do not 'cook the books,'" he recommends. To illustrate some of the tools at institutional investors' disposal, Gao describes cases in which hundreds of hired college students were sent to coffee shops to count the number of cups of coffee sold or to hotel lobbies to count the number of guests checking in as a way of assessing companies' true financial performance.
Regulators must also take note, according to Gao. "As retail participation in equity markets continues to grow, transparency and high-quality financial reporting become particularly important," he warns.
Zhongdong Chen et al, The role of retail investors in the "numbers game": Retail investor attention and earnings management, Journal of Behavioral and Experimental Finance (2026). DOI: 10.1016/j.jbef.2026.101184
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