Title: The Canary in the Coal Mine: The Role of Local Retail Investors in Uncovering Adverse Corporate Information

Authors: Jiaxing You (Xiamen University), Shuyi Zhu (Xiamen University), Jingjing Xia (Wenzhou-Kean University)

Abstract: This study investigates whether local retail investors possess an informational advantage regarding negative news about local firms that is obscured from the broader public. Although managers or governments may suppress adverse corporate information, such news can still reach local residents through informal channels. This grants local retail investors a unique information advantage, particularly regarding negative news, which they may subsequently share online. Utilizing data from a prominent Chinese online investor forum, we find that local investors’ postings exhibit greater negativity towards local firms, specifically in discussions related to firm operations and governance. This negativity predicts future firm performance, traditional media sentiment, and stock price crash risk, confirming its informativeness about forthcoming negative news. Further analysis reveals that firms’ propensity to withhold bad news, rather than government censorship, drives this phenomenon. By highlighting the crucial yet often neglected role of local retail investors in uncovering hidden adverse corporate information, this study sheds novel light on the informational value of retail investors’ online activities and the importance of geographic proximity in understanding information dissemination in capital markets.