Working Paper: NBER ID: w25346
Authors: Kent Daniel; Alexander Klos; Simon Rottke
Abstract: We infer how the estimates of firm value by “optimists” and “pessimists” evolve in response to information shocks by examining returns and disagreement measures for portfolios of short-sale constrained stocks which have experienced large gains or large losses. Our analysis suggests the presence of two groups, one of which overreacts to new information and remains biased over about five years, and a second group which underreacts and whose expectations are unbiased after about one year. Our results have implications for the belief dynamics that underly the momentum and long-term reversal effect.
Keywords: disagreement; short-sale constraints; momentum; long-term reversal
JEL Codes: G0; G12; G4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Positive price shocks (E31) | Strong negative abnormal returns (constrained winners) (D81) |
| Strong negative abnormal returns (constrained winners) (D81) | Adjusted beliefs of optimists towards rational expectations (D84) |
| Negative price shocks (E31) | Strong negative abnormal returns (constrained losers) (G41) |
| Strong negative abnormal returns (constrained losers) (G41) | Quicker resolution of pessimistic beliefs (D91) |
| Investor disagreement persists (G40) | Divergence in beliefs between optimists and pessimists (D80) |