Disagreement about public information quality and informational price efficiency

Chong Huang, Radhika Lunawat and Qiguang Wang

Journal of Financial Economics, 2024, vol. 152, issue C

Abstract: Investors often hold differing opinions on public information quality. This paper shows that such investor disagreement provides a novel explanation for financial market dynamics around earnings announcements. We propose a rational expectations equilibrium model where investors disagree about the precision of a public signal, which separates a pre-news trading period from a post-news trading period. In equilibrium, investor disagreement about public signal precision diminishes informational price efficiency before the news, but enhances it afterward. Consequently, investor disagreement leads to a notable jump in informed trading around the news, a decline in abnormal trading volume before the news and a surge immediately after the news, and underreaction of stock price to announced earnings.

Keywords: Investor disagreement; Informational price efficiency; Dynamic REE model; Trading volume; Price underreaction (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:152:y:2024:i:c:s0304405x23002027

DOI: 10.1016/j.jfineco.2023.103762

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