New evidence on the effect of belief heterogeneity on stock returns

Jeffrey Hobbs (), Hei Wai Lee () and Vivek Singh ()
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Jeffrey Hobbs: Appalachian State University
Hei Wai Lee: University of Michigan-Dearborn

Review of Quantitative Finance and Accounting, 2017, vol. 48, issue 2, No 1, 289-309

Abstract: Abstract We develop a new measure to examine the effect of the heterogeneity of beliefs among investors on stock returns. Our initial results do not support the information asymmetry hypothesis or the sidelined investor hypothesis (and thus are consistent with the unbiased prices hypothesis). However, since the first two hypotheses make opposite predictions regarding stock returns, they may both have merit but offset one another. Further analysis suggests that this is indeed the case. Overall, our results support both the information asymmetry and sidelined investor hypotheses and thus occupy middle ground in the debate on the effect of disagreement on stock returns.

Keywords: Institutional investors; Divergence of opinion; Sidelined investors; Shorting constraints; Information asymmetry; Unbiased prices (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11156-016-0551-7

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