Working Paper: CEPR ID: DP16029
Authors: Gikas Hardouvelis; Georgios Karalas; Dimitri Vayanos
Abstract: We study theoretically and empirically the relationship between investor beliefs, ownership dispersion and stock returns. We find that high dispersion, measured by high breadth or low Herfindahl index, forecasts returns positively for large stocks, as in Chen, Hong and Stein (2002), but negatively for small stocks. We explain that relationship in a difference-of-opinion model in which stocks differ in the size of investor disagreements and the extent of belief polarization. These differences are characterized by range and kurtosis, respectively. Proxying investor beliefs by analyst forecasts, we find that range and kurtosis affect ownership dispersion in the way that our model predicts.
Keywords: differences of opinion; polarization; stock ownership; return predictability
JEL Codes: G10; G11; G12; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high ownership dispersion (G32) | positive forecasts for large stocks (G17) |
| high ownership dispersion (G32) | negative forecasts for small stocks (G17) |
| distribution of investor beliefs (G40) | ownership dispersion (G34) |
| ownership dispersion (G34) | stock returns (G12) |
| range and kurtosis (C46) | ownership dispersion (G34) |
| ownership dispersion (G34) | positive returns for large stocks (G12) |
| ownership dispersion (G34) | negative returns for small stocks (G12) |