We investigate the short-term relation between individual investor trading and stock returns on the Australian Securities Exchange. Stocks heavily bought by individual investors underperform stocks heavily sold over the subsequent three days, with respective returns on to a long-short portfolio of À93, À67 and À12 basis points on days one, two and three. Individuals underperform in small and mid-size stocks when they trade passively using limit orders waiting for the market price to move in their favour. Individuals underperform in large stocks when they trade aggressively using marketable orders. Foreign institutions gain from taking the opposite side of individual trades. We present an information asymmetry-based explanation for the findings.
Using an effectuation theory lens, we study reverse stock splits in the biotech industry where significant uncertainty makes specific scenarios of success difficult to predict. We conjecture and find that, in contrast to other environments where there is less uncertainty, reverse stock splits in the biotech industry are followed by positive abnormal returns over the subsequent 1- to 12-months. Also consistent with our effectuation-based predictions, we find that these returns are positively related to the reverse split ratio, size, cash holding, and long-term debt, and negatively related to the market-to-book ratio and firm age. We also find that liquidity increases after a reverse stock split. These results suggest that the concept of effectuation theory is better suited to analyzing reverse stock splits in the biotech industry.Â
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