Picture a small company whose stock suddenly becomes a topic of conversation online. Thousands of everyday investors start typing its ticker symbol into Google, checking its price, and reading about its prospects. For the executives running that company, this fresh wave of attention raises a quiet question: does anyone care enough to notice if the quarterly numbers are being nudged along?
A study published in the Journal of Behavioral and Experimental Finance investigates exactly that. The researchers set out to learn whether the attention of small, individual investors influences how corporate managers handle their reported earnings. Their central finding is that the answer depends heavily on the size of the company, with attention appearing to push smaller firms toward more earnings management while nudging larger firms in the opposite direction.
The knowledge gap the team wanted to fill
Retail investors, meaning ordinary people buying and selling stocks rather than big institutions, own a large slice of the U.S. market. Older research often treated them as passive and uninformed, unlikely to keep close watch on the companies they invest in. But recent work suggests that, in the digital age, these investors gather information, trade on it, and can move stock prices.
Zhongdong Chen of the University of Northern Iowa, along with Lei Gao of George Mason University and Brett Olsen, also of the University of Northern Iowa, wanted to know what all this attention does to managerial behavior. Specifically, they focused on “earnings management,” a term worth unpacking.
Companies have some discretion in how they report profits. Sometimes managers use accounting choices to shift the timing of revenues and expenses, a practice known as accrual-based earnings management. Other times they change actual business operations, such as offering steep price discounts to pull sales forward, ramping up production to spread fixed costs across more units, or slashing spending on advertising and research to make a quarter look better. This second category is called real earnings management. Both are ways of playing what regulators once nicknamed the “numbers game,” the pressure-driven effort to meet or beat what the market expects.
Managers care about hitting those targets because falling short tends to trigger a sharp negative reaction in the stock price, and poor stock performance is linked to a higher chance of executives losing their jobs. The researchers laid out two competing possibilities. Attention from retail investors might encourage earnings management, because a bigger, more attentive crowd could punish any disappointment more harshly. Or attention might discourage it, because engaged investors demanding information are more likely to catch the manipulation and penalize the stock for it.
How the study was built
To measure how much attention retail investors were paying, the team turned to the Google Search Volume Index, which tracks how often people search for a given term. They reasoned that ordinary investors, unlike professionals with expensive data terminals, tend to research stocks by typing tickers into Google. Their main gauge averaged searches for a company’s ticker, the ticker plus “stock,” and the ticker plus “price.”
The sample covered 1,710 unique U.S. firms from 2004 through mid-2020, producing more than 73,000 firm-quarter observations. For each company and quarter, the researchers calculated several measures of earnings management, building them so that higher values always meant more manipulation. They then used statistical models that accounted for a long list of other influences, including company size, cash flow volatility, analyst coverage, institutional ownership, debt levels, and recent stock performance.
One design choice is worth noting. The team used attention measured in the prior quarter to help rule out the possibility that earnings management was simply attracting attention rather than the other way around. They also ran a battery of additional tests to check that the results held up.
What the overall numbers showed
Across the full sample, higher retail investor attention was associated with more real earnings management. A one-standard-deviation rise in attention corresponded to increases in the various measures of roughly 0.1 to 0.24 percent, which translated to somewhere between about $600,000 and $1.7 million in earnings management for a median-sized firm in a single quarter. The pattern suggested that when attention was high, managers leaned on tactics like price discounts, looser credit terms, extra production, and trimmed discretionary spending to lift short-term earnings.
Consistent with that, higher attention was also linked to larger positive earnings surprises, meaning reported earnings tended to come in further above expectations. The researchers did not find a clear link between attention and accrual-based earnings management for the full sample, which they suggest may reflect the tighter regulatory and auditor scrutiny that accounting adjustments have faced since the Sarbanes-Oxley Act of 2002.
The team also examined whether investors seemed to see through the manipulation. When attention was high, higher levels of accrual-based management and one form of real management (the sales-related cash flow measure) were associated with weaker stock returns around earnings announcements. The authors interpret this as evidence that attentive retail investors can detect certain kinds of earnings management, though not all of them, since other forms showed no such penalty.
The size story
The most striking result emerged when the researchers split their sample into smaller and larger companies based on market value. The two groups behaved almost as mirror images.
For smaller firms, higher attention was associated with more earnings management of nearly every type, including both accrual-based and real varieties. For larger firms, higher attention was associated with less of it. The influence of attention on earnings surprises was also stronger among smaller companies.
The authors point to information asymmetry as a likely explanation. Smaller firms tend to be less transparent, with fewer analysts following them and less information flowing to the public. That gap, the researchers argue, could make it harder for retail investors to spot earnings management at small companies, which in turn may give managers room to manage earnings in order to avoid being penalized for missing expectations.
They are careful to offer a second, equally plausible reading. Because smaller firms struggle to communicate their true prospects, managers there might use earnings management not to deceive but to signal genuine strength that standard reporting has not yet captured. Under this view, the link between attention and earnings management at small firms reflects an effort to communicate rather than mislead. The study’s design cannot fully separate these two interpretations.
Additional patterns and robustness
The team ran their analysis through many variations to test its durability. They found that attention was linked to earnings smoothing, meaning efforts to make income look steadier over time, with smaller and larger firms using different techniques. They also found stronger effects among companies that just barely beat analyst forecasts by a penny or less, the so-called “suspect” firms most likely to be nudging their numbers.
A comparison across time periods added another wrinkle. After commission-free trading platforms arrived around 2015 and drew in a new wave of retail investors, the influence of attention on earnings management and earnings surprises shifted, which the authors read as further evidence that retail attention genuinely shapes managerial choices. The results also held when they used a different attention measure and when they accounted for the separate attention of institutional investors.
What to keep in mind
This is observational research, so it describes associations rather than proving that attention causes managers to act. The researchers took several steps to strengthen the case for a real link, but the findings are best understood as patterns in the data rather than definitive cause and effect.
The study also relies on Google searches as its window into retail attention. The authors note that other windows, such as activity on platforms like Reddit, StockTwits, or SeekingAlpha, might tell a somewhat different story, and they flag this as a question for future work. Still, the core message offers evidence that everyday investors, once dismissed as bystanders, may be quietly influencing the numbers companies report, in ways that shift with a firm’s size and how much the outside world can see.
