This paper investigates the dynamic relation between net individual investor trading and short-horizon returns for a large cross-section of NYSE stocks. The evidence indicates that individuals tend to buy stocks following declines in the previous month and sell following price increases. We document positive excess returns in the month following intense buying by individuals and negative excess returns after individuals sell, which we show is distinct from the previously shown past return or volume effects. The patterns we document are consistent with the notion that risk-averse individuals provide liquidity to meet institutional demand for immediacy.FOR A VARIETY OF REASONS, financial economists tend to view individuals and institutions differently. In particular, while institutions are viewed as informed investors, individuals are believed to have psychological biases and are often thought of as the proverbial noise traders in the sense of Kyle (1985) or Black (1986). One of the questions of interest to researchers in finance is how the behavior of different investor clienteles or their interaction in the market affects returns. In this paper we focus on the interaction between individual investors and stock returns.Specifically, we examine the short-horizon dynamic relation between the buying and selling by individuals and both previous and subsequent returns using a unique data set provided to us by the NYSE. The data set was constructed from the NYSE's Consolidated Equity Audit Trail Data (CAUD) files that contain detailed information on all orders that execute on the exchange. For each stock on each day we have the aggregated volume of executed buy and sell orders of individuals. This information enables us to create a measure of net individual investor trading.We examine the extent to which intense net buying or selling by individuals in a stock is related to the stock's past returns and the extent to which such intense net trading by individuals predicts future returns. Consistent with earlier * Ron Kaniel is from the Fuqua School of Business, Duke University. Gideon Saar is from the 274The Journal of Finance studies, we find that individuals tend to buy after prices decrease and sell after prices increase. The mean market-adjusted return in the 20 days prior to a week of intense individual selling is 3.15%, while that prior to a week of intense individual buying is −2.47%. More interestingly, we find that the trades of individuals can be used to forecast future returns. Specifically, we find that stocks experience statistically significant excess returns of 0.80% in the 20 days following a week of intense buying by individuals, and −0.33% following a week of intense individual selling.Although this paper considers several potential explanations for this finding, the one that best explains our findings is that the contrarian tendency of individuals leads them to act as liquidity providers to institutions that require immediacy. Following Stoll (1978), Miller (1988), andCampbell, Grossman, andWan...

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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We present evidence that fund managers inflate quarter-end portfolio prices with last-minute purchases of stocks already held. The magnitude of price inflation ranges from 0.5 percent per year for large-cap funds to well over 2 percent for small-cap funds. We find that the cross section of inflation matches the cross section of incentives from the flow/performance relation, that a surge of trading in the quarter's last minutes coincides with a surge in equity prices, and that the inflation is greatest for the stocks held by funds with the most incentive to inflate, controlling for the stocks' size and performance. Leaning for the Tape: Evidence of Gaming Behavior In Equity Mutual Funds AbstractWe show that quarter-end prices of equity funds are inflated, presenting a large profit opportunity to potential sellers and an equivalent hazard to buyers and remaining shareholders. The magnitude of price inflation ranges from 50 basis points per year for large-cap funds to well over 200 basis points for small-cap funds. Evidence suggests that fund managers cause the inflation with last-minute purchases of stocks already held, deliberately moving performance to one period from the next. We find that the cross section of inflation matches the cross section of incentives from the flow/performance relation, that a surge of trading in the quarter's last minutes coincides with a surge in equity prices, and that the inflation is greatest for the stocks held by the funds with most incentive to inflate, controlling for the stocks' size and performance.

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