I test whether social influence affects individual investors’ trading and stock returns. In each of the 20 most active stocks in Finland over 9 years, the number of owners in a municipality multiplied by the number of investors who do not own a stock, a measure of the rate of transmission of diseases and rumors through social contact, predicts individual investor trading. I control for known determinants of trade, including daily news, and show that competing explanations for the relation are unlikely. Socially motivated trades predict stock returns, and the effects are not reversed, suggesting that individuals share useful information. Individuals’ susceptibility to social influence has declined during the period, but the opportunities for social influence have increased.

This is the first paper to examine the microstructure of how mispricing is created and resolved. We study dual-class shares with equal cash flow rights and show that a simple trading strategy exploiting gaps between their prices appears to create abnormal profits after transactions costs. Trade and quote data show that investors shift their trading patterns to take advantage of gaps. Contrary to common perception, long–short arbitrage plays a minor part in eliminating gaps, and one-sided trades correct most of them. We also show that the more liquid share class is usually responsible for the price discrepancies.