Source: Dissertation Abstracts International, Volume: 71-07, Section: A, page: 2580.

Adviser: Nicholas C. Barberis.

This dissertation examines individual investors' trading behavior, and how this impacts asset prices and other features of the stock market.

In "Skewness Preference and the Cross-Section of IPO Returns", I study how some retail investors' preference for lottery-like outcomes impacts holdings of IPO stocks and may lead to an initial overvaluation and subsequent underperformance of these IPOs. I test this prediction by using institutional ownership directly following the IPO as an indicator of expected skewness. I find that stocks with a high individual investor presence following the IPO have a higher future realized skewness and greater underperformance compared to other IPO stocks. Further, it is the IPOs with both high individual investor presence and high first-day returns that underperform the most and that have the highest levels of future skewness.

My joint work with Dasol Kim, "How Prior Outcomes Affect Investors' Subsequent Risk Taking", addresses how prior realized returns impact an individual investor's appetite for future risk taking. We show that investors who experience big gains or losses in the first half of the year are more likely to decrease the risk in their stock portfolio over the second half of the year. We find this pattern to be due to investors failing to rebalance their portfolios fully in response to extreme returns, resulting on average in net sales of stock during the subsequent period.

In "Style Investing and Mutual Fund Flows", I use mutual fund flows to gauge small investor sentiment in different sectors, such as industry or geographical regions. I find that short-term momentum and long-term reversal strategies based on past return and past fund flow are profitable. The momentum effect is sustained even after adjusting for common factors of stock returns and market-wide momentum. Both the momentum and reversal results are considerably stronger when the fund flow indicator is used in addition to the past style returns in the predictive regression. These findings support the style investing hypothesis of investor behavior, and provide empirical evidence that the performance of investment styles is not only driven by their fundamentals, but also the relative performance of other, non-related, styles.