Working Paper: NBER ID: w28697
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: Investor beliefs; Ownership dispersion; Stock returns
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 |
|---|---|
| Ownership dispersion (G34) | Stock returns (large stocks) (G12) |
| Ownership dispersion (G34) | Stock returns (small stocks) (G17) |
| Range and kurtosis of analyst forecasts (C46) | Ownership dispersion (G34) |
| Narrow investor base (G19) | Stock returns (small stocks) (G17) |
| Ownership dispersion (breadth) (G34) | Stock size (L67) |
| Herfindahl index (C43) | Expected returns (small stocks) (G17) |