The Association between Nonprofessional Investors' Information Choices and Their Portfolio Returns: The Importance of Investing Experience*

Abstract

In this paper we use a unique dataset to investigate the relationship between nonprofessional investors' information choices and their portfolio returns. We also investigate the role investing experience plays in this relationship. We find that nonprofessional investors earn lower returns as their use of unfiltered information (e.g., SEC filings) increases relative to their use of filtered information (e.g., Value Line analysts reports), and that investment experience not only moderates but actually reverses this negative relationship. Specifically, less (more) experienced nonprofessional investors earn lower (higher) returns as their use of unfiltered information increases. Our results suggest that this effect is driven by investors' ability to understand and use unfiltered information as they gain investing experience, not by a shift in their information choices. These findings are particularly relevant in the current reporting environment where greater numbers of inexperienced investors are entering the markets and recent legislation (e.g., Sarbanes Oxley Act of 2002) requires firms to disclose more detailed financial information.

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