Demand for Stocks and Accounting Information

We use equity portfolio allocation decisions to study the relevance of accounting information for investors’ demand for stocks. We document significant heterogeneity across investors in the demand relevance of profitability measures and income statement components. Although operating profit dominates gross profit and net income in explaining the aggregate demand for stocks, this does not hold across investor-specific demands. We predict and find that the relevance of accounting information varies as a function of investors’ objectives. Active investors have a higher demand sensitivity to reported profits. Our analysis reveals that individual investors’ demands have an important effect on the equilibrium relation between stock prices and accounting variables