Trading aggressiveness and market efficiency

Abstract Stein (2009) shows that crowding by sophisticated traders can cause price overreaction. To test Stein's theory, in this paper I use trading aggressiveness after earnings releases as a measure of crowding. With a large number of traders, their strong aggregate demand makes trade execution more difficult, and leads every individual investor to trade more aggressively. I find that the prices of aggressively traded stocks overreact after good news, but not after bad news, except during the financial crisis. The asymmetry in observed results can be explained by differences in belief heterogeneity of investors and market attention during news releases.