Firm Opacity and Retail Investments in Attention Stocks and Lottery Stocks: Evidence from Robinhood Investors

This study investigates whether firm opacity impacts the investment behaviors and outcomes of retail investors using the fintech brokerage Robinhood (i.e., “RH investors”). We theorize that higher firm opacity leads RH investors to make nonrational investment decisions. The testable prediction is that firm opacity increases RH investors’ investments in attention stocks and lottery stocks, which are prominent nonrational behaviors of retail investors. Empirical findings using a measure of RH investors’ stock holdings support this prediction. Furthermore, firm opacity amplifies RH investors’ negative returns from investing in attention stocks and lottery stocks. Additional analyses show that the effect of firm opacity on RH investors’ stock holdings persists during the COVID-19 pandemic, and that opacity affects RH investors’ stock trading. These findings suggest that reducing firm opacity could help to lessen the nonrational investments, as well as the associated adverse consequences, of retail investors trading on Robinhood-type platforms.