Online Appendix

Using messages from Twitter and StockTwits, we provide cross-sectional evidence that stocks are exposed to return extrapolation. When a stock experiences high returns, sentiment towards that stock increases substantially. Consistent with findings that investors perceive capital gains differently than dividends, the sentiment of non-dividend-paying stocks responds to past returns up to 5 times more strongly than dividend-paying stocks. Using dividend-paying status to proxy for return extrapolation exposure (RXE), we find that momentum and long-term reversal returns are stronger for non-dividend-paying stocks, suggesting that RXE contributes to these anomalies. However, we find little evidence that RXE explains the value premium.

On average, retail investors tend to sell stocks after high recent returns. While research suggests that such contrarian behavior is a silver lining of retail trading, we show that it only applies to positions with unrealized capital gains and reverses for loser stocks. The salience of portfolio positions as well as take-gain and stop-loss trading produce this systematic variation in contrarian selling. We examine the effects of this trading behavior on asset prices and provide evidence that conditional contrarian selling impacts short-term return reversals and stock return volatility. Using stock splits as a natural experiment, we provide evidence in support of a causal interpretation of our findings.

Online Appendix

A firm’s investment responds to the stock valuations of peer firms. For neighboring peers, this relation is stronger among financially constrained firms, robust to controlling for regional investment, and is driven by a more speculative component of valuations – the same is not true for industry peers. These geographical findings are difficult to reconcile with existing theories that link firm valuations to managerial learning. Instead, our findings suggest that lenders learn from peer firm valuations and allocate more credit to regions with higher stock valuations. Consistent with this explanation, financially constrained firms issue more debt and receive lower loan spreads when neighboring peer firms have higher valuations.

We provide evidence that purchase prices impact how investors behave towards extreme returns. Using a sample of individual investor trades and extreme return dates, we show that when a stock is trading farther from an investor's purchase price, the investor is more likely to trade in the direction of the stock's return. Consistent with relative overreaction, stocks trading farthest from their average purchase price experience the most extreme returns, which are then followed by greater subsequent reversals. A cross-sectional strategy motivated by these findings earns a monthly alpha of 1.02%.