What drives retail investors’ overconfidence? The role of information acquisition costs

Abstract

We examine whether information acquisition costs affect the overconfidence of retail investors. Using the implementation of the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system as an exogenous event, we find that overconfidence, measured by investors’ post-trade performance, is significantly reduced after companies join the EDGAR platform, and the reduction is greater for companies with higher information uncertainty. The decrease in overconfidence after the implementation of EDGAR is associated with lower levels of investor disagreement and stock mispricing.