| dc.description.abstract | We find that stocks with lower (higher) trading turnover have higher (lower) future returns over five years, and the low turnover premium is less likely associated with compensation for risk or liquidity hypothesis. If the turnover effect presents mispricing due to systematic expectation bias, then professional arbitrageurs should exploit this opportunity and eliminate the mispricing quickly. However, the existence of low turnover premium implies that some reasons let arbitrageurs are not willing to execute arbitrage activities. We show that the low turnover premium is greater for stocks with higher idiosyncratic volatility, higher transaction costs, and lower investor sophistication, corresponding with the market-mispricing explanation for the turnover anomaly. And the stocks with high idiosyncratic volatility (Ivolatility) and stocks with low number of institutional owners (Inst#) have the greatest low turnover premium. Furthermore, the turnover effects for high Ivolatility stocks exceeds low Ivolatility stocks in 31 of the 36 sample years, and for low Inst# stocks surpasses high Inst# stocks in 22 of the 25 sample years. We also show that high Ivolatility and low Inst# will strengthen the turnover effect, beyond the other arbitrage risk, transaction costs and investor sophistication measures. This evidence suggests that high idiosyncratic volatility and low investor sophistication will deter arbitrage activities.
| en_US |