We study the trading of individual investors using transaction data and identifying buyeror seller-initiated trades. We document four results: (1) Small trade order imbalance correlates well with order imbalance based on trades from retail brokers. (2) Individual investors herd. (3) When measured annually, small trade order imbalance forecasts future returns; stocks heavily bought underperform stocks heavily sold by 4.4 percentage points the following year. (4) Over a weekly horizon small trade order imbalance reliably predicts returns, but in the opposite direction; stocks heavily bought one week earn strong returns the subsequent week, while stocks heavily sold earn poor returns.

Shleifer and Vishny (1997) argue that arbitrage can be both costly and risky. As a result, arbitrageurs will not exploit arbitrage opportunities if the costs and risk of arbitrage exceed its benefits, thereby allowing mispricing to survive for long periods of time. Frankel and Lee (1998) document that the fundamental value-to-price (Vf/P) ratio predicts future abnormal returns for up to three years, where Vf is an estimate of fundamental value based on a residual income model that uses analyst earnings forecasts. Ali, Hwang and Trombley (2003a) further show that their results seem consistent with the mispricing explanation rather than with the risk explanation of the Vf/P effect. Thus, the Vf/P effect provides a good means to examine the limits of arbitrage. We find that the Vf/P effect is extremely weak in stocks of old age (measured by the history of listing), low investor sophistication, high divergence of opinion, high idiosyncratic return volatility, and high transaction costs. Further analysis shows that firm age, earnings quality, and divergence of opinion have incremental power beyond other measures of risk in explaining the cross-sectional variation in the Vf/P effect. Our results appear to be consistent with the argument of the limits of arbitrage. More specifically, when arbitrageurs exploit arbitrage opportunities, they seek to avoid mispriced stocks with the greatest arbitrage risk. JEL Classification: G10, G11, G14

* I am deeply indebted to my dissertation committee members Yongheng Deng

∗Preliminary and incomplete. Please do not quote without authors ’ permission.

Conference and the Northern Finance Association Meetings for helpful comments. We thank Bob Keays for excellent

Abstract: This paper examines the role of financial news coverage in China‘s stock market, and, in so doing, sheds some light on the underlying mechanisms of media influence. Our results show that firms with more media coverage are associated with higher probabilities of mispricing and stock price crashes as well as lower expected returns and more active trading. Further, companies with more media coverage are associated with larger bid-ask spreads and higher analyst forecast dispersion. Our cross-sectional and event study evidence suggests that the mass media affect China‘s stock market primarily by increasing disagreement among investors, consistent with Miller (1977). Key words: Media coverage, divergence of opinion, mispricing, stock price crash,

Innovative capacity (IC) is the ability of firms to produce and commercialize a sequence of innovations. Expected returns need not fall following asset growth by high IC firms because investment can generate new growth options. Using patent intensity based IC measures we provide the first analysis of the effects of IC on financial markets ' response to asset growth. We find that the well-known negative relation between asset growth and subsequent excess returns holds only for firms with high asset growth and low IC and does so in a stronger and more robust fashion than reported earlier. However, high IC firms with high asset growth not only do not suffer negative excess returns but actually earn significantly positive subsequent excess returns. Moreover, and as predicted by a model of optimal dynamic investment with sequentially arising growth options, changes in the market risk loadings of firms following asset growth episodes are positively related to their IC. The innovative capacity of firms, therefore, appears to play an important role in the dynamics between their asset growth and returns, and in driving their timevarying market risk.

Abstract: Firm-level studies of the financial impacts of Information Technology (IT) events have often focused on announcement period returns based on the capital asset pricing model (CAPM). This approach may have two sets of distinct but related limitations for many classes of IT events. First, the use of announcement period assumes the market is efficient in its assimilation and pricing of all information about the event. However, a firm not be aware of the organizational changes required for success of the IT event, or may not have the incentive to disclose such information for competitive reasons. Either way, we expect many types of IT events to be characterized by low information disclosure, which, along with investor biases, is likely to impede efficient pricing of the IT event by financial markets. Second, event studies in Information Systems (IS) largely rely on CAPM, which considers only systematic risks in the pricing of expected returns on IT assets, and assumes that idiosyncratic or firm-specific risks are eliminated through efficient diversification. Yet one of the foundations of the IS discipline is the notion that IT matters, largely because firms have different capabilities to develop, deploy and manage IT resources to create value. Thus there is a disconnect between a basic theoretical tenet of the IS field and the methodology deployed to assess the value of IT events. We develop a framework involving the maturity of the IT event and the scope of complementary changes to assess the extent of information