Book/Market Fluctuations, Trading Activity, and the Cross‐section of Expected Stock Returns

We analyze trading activity accompanying equities’ switches from “growth” (low book‐tomarket ratios (BMRs)) to “value” (high BMRs), and vice versa. We find that a large BMR increase, that is a shift from growth to value, is accompanied by a strongly negative small order imbalance (OIB). Large OIB exhibits weaker patterns across stocks that experience large changes in book/market. The evidence indicates that growth‐to‐value shifts are more strongly related to small traders than large ones. The interaction of BMRs with order flows plays a crucial role in return predictability. Specifically, the predictive ability of BMRs for future returns is significantly enhanced for those stocks that have experienced book/market increases as well as high levels of net selling by way of small orders.