Abstract
In this paper, we examine the turnover effect in China's stock market and find that stocks with low turnover generate higher future returns than stocks with high turnover. The turnover effect is robust after various liquidity measures are controlled for, and it cannot be explained by existing asset-pricing models. Further evidence reveals that the turnover effect (1) is stronger when sentiment is high; (2) is stronger for stocks with lower investor sophistication, higher idiosyncratic volatility, higher transaction costs, and lower institutional ownership; and (3) persists in longer horizons. These findings are consistent with the mispricing explanation.
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