Stock and options markets can disagree about a stock’s value because of informed trading in options and/or price pressure in the stock. The predictability of stock returns based on this cross-market discrepancy in values is especially strong when accompanied by stock price pressure, and it does not depend on trading in options. We argue that option-implied prices provide an anchor for fundamental stock values that helps to distinguish stock price movements resulting from pressure versus news. Overall, our results are consistent with stock price pressure being the primary driver of the option price-based stock return predictability. This paper was accepted by Tyler Shumway, finance.

We show that CEOs strategically time corporate news releases to coincide with months in which their equity vests. These vesting months are determined by equity grants made several years prior, and thus unlikely driven by the current information environment. CEOs reallocate news into vesting months, and away from prior and subsequent months. They release 5% more discretionary news in vesting months than prior months, but there is no difference for non-discretionary news. These news releases lead to favourable media coverage, suggesting they are positive in tone. They also generate a temporary run-up in stock prices and market liquidity, potentially resulting from increased investor attention or reduced information asymmetry. The CEO takes advantage of these effects by cashing out shortly after the news releases.

We find that CEOs release 20% more discretionary news items in months in which they are expected to sell equity, predicted using scheduled vesting months. These vesting months are determined by equity grants made several years prior, and thus unlikely driven by the current information environment. The increase arises for positive news, but not neutral or negative news, nor non-discretionary news. News releases fall in the month before and month after the vesting month. News in vesting months generates a temporary increase in stock prices and market liquidity, which the CEO exploits by cashing out shortly afterwards.

We examine the problem of an investor who trades in a market with unobservable regime shifts. The investor learns from past prices and is subject to transaction costs. Our model generates significantly larger liquidity premia compared to a benchmark model with observable market shifts. The larger premia are driven primarily by suboptimal risk exposure, as turnover is lower under incomplete information.In contrast, the benchmark model produces (mechanically) high turnover and heavy trading costs. We provide empirical support for the amplification effect of incomplete information on the relation between trading costs and future stock returns. We also show empirically that such amplification is not driven by turnover. Overall, our results can help explain the large disconnect between theory and evidence regarding the magnitude of liquidity premia, which has been a longstanding puzzle in the literature.