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seminar participants at the Wharton School and at the 1998 conference in "Accounting and Finance in Tel-Aviv" for their comments and suggestions. All remaining errors are the authors' responsibility. AbstractThe idea that extreme trading activity (as measured by trading volume) contains information about the future evolution of stock prices is investigated. We find that stocks experiencing unusually high (low) trading volume over a period of one day to a week tend to appreciate (depreciate) over the course of the following month. This effect is consistent across firm sizes, portfolio formation strategies, and volume measures. Surprisingly, the effect is even stronger when the unusually high or low trading activity is not accompanied by extreme returns, and appears to be permanent.The significantly positive returns of our volume-based strategies are not due to compensation for excessive risk taking, nor are they due to firm announcement effects. Previous studies have documented the positive contemporaneous correlation between a stock's trading volume and its return, and the autocorrelation in returns. The high volume return premium that we document in this paper is not an artifact of these results. Finally, we also show that profitable trading strategies can be implemented to take advantage of the information contained in trading volume.

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A risk-averse manager's overconfidence makes him less conservative. As a result, it is cheaper for firms to motivate him to pursue valuable risky projects. When compensation endogenously adjusts to reflect outside opportunities, moderate levels of overconfidence lead firms to offer the manager flatter compensation contracts that make him better off. Overconfident managers are also more attractive to firms than their rational counterparts because overconfidence commits them to exert effort to learn about projects. Still, too much overconfidence is detrimental to the manager since it leads him to accept highly convex compensation contracts that expose him to excessive risk.A VAST EXPERIMENTAL LITERATURE finds that individuals are usually overconfident in that they believe their knowledge to be more precise than it actually is. The incidence of overconfidence is likely to be even greater among CEOs than among individuals at large; for example, Goel and Thakor (2008) show that overconfident individuals are more likely to win the intrafirm tournaments that lead to the rank of CEO. Since overconfidence directly influences decision-making, it is logical to investigate the effects that overconfident managers have on corporate policies and firm value. How does overconfidence affect the investment decisions that managers make on behalf of shareholders? How do compensation contracts optimally adjust to these effects? Do firms benefit from managerial overconfidence? Can overconfidence ever benefit the biased

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