This paper tests whether the persistence of the momentum and reversal effects is the result of idiosyncratic risk limiting arbitrage. Idiosyncratic risk deters arbitrage, regardless of the arbitrageur’s diversification. Reversal is prevalent only in high idiosyncratic risk stocks, suggesting that idiosyncratic risk limits arbitrage in reversal mispricing. This finding is robust to controls for transaction costs, informed trading, and systematic relations between idiosyncratic risk and subsequent returns. Momentum is not related to idiosyncratic risk. Momentum generates a smaller aggregate return than reversal, so the findings along with those in related studies suggest that transaction costs are sufficient to prevent arbitrageurs from eliminating momentum mispricing.

Firms increasingly issue shares for the purpose of cash savings. During the 1970s, 1.00 of issuance resulted in 0.23 of cash savings; over the most recent decade, 1.00 of issuance resulted in 0.60 of cash savings. This increase is caused by increasing precautionary motives. Proxies for precautionary motives increase over the sample period, and firm-level increases in these proxies are associated with firm-level increases in share issuance–cash savings. Share issuance–cash savings are inversely related to issuance costs, suggesting that firms issue and save when costs are low, so as to avoid issuing when costs are high. This framework can also help explain patterns and trends in share issuance activity over time. Market timing does not explain these effects, as share issuance–cash savings are not related to post-issuance stock returns.

We study the out‐of‐sample and post‐publication return predictability of 97 variables shown to predict cross‐sectional stock returns. Portfolio returns are 26% lower out‐of‐sample and 58% lower post‐publication. The out‐of‐sample decline is an upper bound estimate of data mining effects. We estimate a 32% (58%–26%) lower return from publication‐informed trading. Post‐publication declines are greater for predictors with higher in‐sample returns, and returns are higher for portfolios concentrated in stocks with high idiosyncratic risk and low liquidity. Predictor portfolios exhibit post‐publication increases in correlations with other published‐predictor portfolios. Our findings suggest that investors learn about mispricing from academic publications.

Some U.S. firms have women directors and executives, while many do not. We seek to explain this heterogeneity. Using U.S. Census data from 1900, we find that U.S. counties with populations originating from countries with stronger gender-egalitarian beliefs have more women in the labor market and in STEM occupations, and lower gender-pay gaps. Firms headquartered in such counties have more women executives and directors. When firms move to more gender-egalitarian counties, the representation of women on board increases. Our findings are consistent with the idea that inherited beliefs about gender roles impact the labor market and corporate leadership.

Earlier studies have linked equity market liberalization to growth in emerging markets. Some conclude liberalization causes growth, whereas others contend contemporaneous economic policies and conditions play important roles. The causal argument contends that foreigner investability in public firms leads to lower discount rates and greater share issuance, investment, and efficiency. Using three separate measures of foreign investability, we do not find these effects. Moreover, common de jure foreigner-investability measures are poor de facto measures. Economic indicators, not directly influenced by equity market liberalization, also grow faster in countries with more investable firms. Our findings suggest foreigner investability cannot fully explain the equity-market-liberalization-growth relation.

Share issuance predicts cross-sectional returns in a non-U.S. sample of stocks from 41 different countries. Issuance predictability has greater statistical significance than either size or momentum, and is similar to book-to-market. As in the U.S., the international issuance effect is robust across both small and large firms. Unlike the U.S., the effect is driven more by low returns after share creation rather than positive returns following share repurchases. Issuance return predictability is stronger in countries with greater issuance activity, greater stock market development, and stronger investor protection. The results suggest that the share issuance effect is related to the ease with which firms can issue and repurchase their shares.

Previous studies have shown that high short interest stocks have low subsequent returns. We test whether the persistence of this effect is due to costs limiting arbitrage. The arbitrage cost that we focus on is idiosyncratic risk which, regardless of the arbitrageur’s level of diversification, deters arbitrage activity. Consistent with costly arbitrage, we find that among high short interest stocks a one standard deviation increase in idiosyncratic risk predicts a more than 1% decline in monthly returns. Moreover, idiosyncratic risk does not predict returns across low short interest stocks, and short interest does not predict low returns across low idiosyncratic risk stocks. Our results are robust to commonly used proxies for both transaction costs and short sale constraints.

At year-end, some allege that institutional investors try to mislead investors by placing trades that inflate performance (portfolio pumping) or distort reported holdings (window dressing). We contribute direct tests using daily institutional trades and find that year-end price inflation derives from a lack of institutional selling rather than institutional buying. In fact, institutional buying declines at year-end. Consistent with pumping, institutions tend to buy stocks in which they already have large positions. We find no evidence of window dressing, as institutions are not more likely to buy high-past return stocks or sell low-past return stocks at year- or quarter-end.

Analysts' price targets and recommendations contradict stock return anomaly variables. Using an index based on 125 anomalies, we find that analysts' annual stock return forecasts are 11% higher for anomaly-shorts than for anomaly-longs. Anomaly-shorts’ return forecasts are excessively optimistic, exceeding realized returns by 34%. Recommendations also tend to be more favorable for anomaly-shorts, although this result varies across anomaly types. Consistent with analysts' slowly incorporating anomaly information, anomalies forecast revisions in both price targets and recommendations. Our findings imply that investors who follow analysts' actionable information contribute to mispricing.

We assess how nine different categories of market participants trade relative to a comprehensive forecasted-return variable based on 193 predictors. Firms and short sellers tend to be the smart money—both sell stocks with low-forecasted returns, and their trades predict returns in the intended direction. Retail investors trade against forecasted returns. Retail investors’ and institutions’ trades predict returns opposite to the intended direction. This poor trading performance is driven by trades in stocks with either high- or low-forecasted returns. The forecasted-return variable predicts returns more strongly in stocks with more intense retail trading, consistent with retail investors exacerbating mispricing.