Essays on cross-sectional stock returns

Abstract

This thesis consists of three essays on the cross-section of stock returns. The first essay examine the impact of V-shaped disposition effect in Korean stock markets. The second essay investigates the firm performance of environmentally innovative firms. The third essay analyze the impact of optimistic bias in analysts' earnings forecasts on informed trading in option markets. In the first essay, I document the existence of the V-shaped disposition effect in Korean stock markets, which is characterized by a high proportion of retail investors. By utilizing a specified dataset containing stock-level information on the trading activities of different types of investors, we find that net selling pressure has a positive effect on the cross-section of subsequent stock returns, and this relationship appears only when accounting for individual trading. Furthermore, this net selling propensity of retail investors delays the incorporation of good news into stock price, while helps stock price reflect its bad news. The second essay examines the effect of environmental innovation on future profitability as well as stock returns for US firms. By using environmental patents as a proxy for environmental innovation, we find that environmentally innovative firms have higher, more persistent, and less volatile profitability and higher future stock returns. Furthermore, we empirically demonstrate the competitive advantage and increased probability of firm survival of environmentally innovative firms. The third essay investigates the effect of optimistic bias in analysts' forecasts from suppressed negative forecasts on informed trading in option market. We document that the return predictability of option trading is more pronounced when optimistic bias is greater, implying that informed investors holding negative information exploit optimistic biases by engaging more active option trading. We also find that the interactive effect of optimistic bias and option trading is more pronounced around earnings announcements and for stocks with high liquidity option.