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Abstract:
This paper documents a close link between mispricing and liquidity by investigating stocks with high analyst disagreement. Previous research finds that these stocks tend to be overpriced, but that prices correct downwards as uncertainty about earnings is resolved. Our analysis suggests that one reason mispricing has persisted through the years is that analyst disagreement coincides with high trading costs. We also show that in the cross-section, the less liquid stocks tend to be more severely overpriced. Additionally, increases in aggregate market liquidity accelerate the convergence of prices to fundamentals. As a result, returns of the initially overpriced stocks are negatively correlated with the time series of innovations in aggregate market liquidity.

Analyst disagreement, mispricing, liquidity, Kyle lambda, limits of arbitrage

Abstract:
I provide empirical support for Miller's (1977) hypothesis that a stock price will reflect the optimistic view whenever there is disagreement about its value. Using dispersion in analyst earnings forecasts as a proxy for disagreement, I find that high-dispersion stocks earn lower returns than otherwise similar stocks. This effect is more pronounced for small-cap and growth stocks. The subnormal returns are linked to the resolution of uncertainty. I also document that consensus earnings forecasts are more optimistic the higher the dispersion in underlying estimates - consistent with a view that the more pessimistic analysts chose not to issue forecasts.

Differences of opinion, forecast dispersion, optimism, disagreement about stock value, analyst forecasts, price bias, short-sale costs, disagreement, consensus forecast bias, market efficiency

Abstract:
We show that new managers who take over mutual fund portfolios typically proceed to sell off inherited momentum losers. They sell losers at higher rates than stocks in any other momentum decile, even after adjusting for concurrent trades in these stocks by continuing fund managers. This behavior persists even when managers take over well-performing funds and funds with positive fund flows where it is unlikely that they are expected to change fund strategy or sell holdings to meet redemption demand. We conjecture that continuing fund managers tend to hold on to losers because of their inability to ignore the sunk costs associated with the stocks' past underperformance. Furthermore, we present evidence that the sell-off creates price pressure in the market by showing that the losers inherited in high quantities by new managers experience negative abnormal returns in up to two weeks following the completion of managerial change.

Sunk-Cost Fallacy, Price Pressure, Managerial Turnover

Abstract:
We show that new managers who take over mutual fund portfolios typically proceed to sell off inherited momentum losers. They sell losers at higher rates than stocks in any other momentum decile, even after adjusting for concurrent trades in these stocks by continuing fund managers. This behavior persists even when managers take over well-performing funds and funds with positive fund flows where it is unlikely that they are expected to change fund strategy or sell holdings to meet redemption demand. We conjecture that continuing fund managers tend to hold on to losers because of their inability to ignore the sunk costs associated with the stocks' past underperformance. Furthermore, we present evidence that the sell-off creates price pressure in the market by showing that the losers inherited in high quantities by new managers experience negative abnormal returns in up to two weeks following the completion of managerial change.

Sunk-Cost Fallacy, Price Pressure, Managerial Turnover

Abstract:
We show that stocks that experience a sudden increase in idiosyncratic volatility earn abnormally high contemporaneous returns but significantly underperform otherwise similar stocks in the future. Our findings indicate that volatility jumps can be traced to unusual firm-level news. We conjecture that these unusual news events increase the level of investor disagreement about firms' fundamental values. Because short-selling of highly volatile stocks is costly, prices rise to reflect the more optimistic views but then revert down as investors' opinions start to converge. The observed patterns of trade order imbalances and effective spreads lend support for this hypothesis.

unusual news events, volatility shocks, differences of opinion

Abstract:
We show that stocks that experience a sudden increase in idiosyncratic volatility earn abnormally high contemporaneous returns but significantly underperform otherwise similar stocks in the future. Our findings indicate that volatility jumps can be traced to unusual firm-level news. We conjecture that these unusual news events increase the level of investor disagreement about firms' fundamental values. Because short-selling of highly volatile stocks is costly, prices rise to reflect the more optimistic views but then revert down as investors' opinions start to converge. The observed patterns of trade order imbalances and effective spreads lend support for this hypothesis.

volatility shocks, unusual news events, divergence of opinion

Abstract:
We show that stocks that experience a sudden increase in idiosyncratic volatility earn abnormally high contemporaneous returns but significantly underperform otherwise similar stocks in the future. Our findings indicate that volatility jumps can be traced to unusual firm-level news. We conjecture that these unusual news events increase the level of investor disagreement about firms' fundamental values. Because short-selling of highly volatile stocks is costly, prices rise to reflect the more optimistic views but then revert down as investors' opinions start to converge. The observed patterns of trade order imbalances and effective spreads lend support for this hypothesis.

volatility shocks, unusual news events, divergence of opinion

Abstract:
We present evidence of inefficient information processing in equity markets by documenting that biases in analysts' earnings forecasts are reflected in stock prices. In particular, we show that investors fail to fully account for optimistic bias associated with analyst disagreement. This bias arises for two reasons. First, analysts issue more optimistic forecasts when earnings are uncertain. Second, analysts with sufficiently low earnings expectations who choose to keep quiet introduce an optimistic bias in the mean reported forecast that is increasing in the underlying disagreement. Indicators of the missing negative opinions predict earnings surprises and stock returns. By selling stocks with high analyst disagreement institutions exert correcting pressure on prices.

analyst disagreement, earnings momentum, forecast bias, missing forecasts

Abstract:
I present evidence of inefficient information processing in equity markets by documenting that negative information withheld by securities analysts is incorporated in stock prices with a significant delay. I estimate the extent of the withheld negative information based on the proportion of analysts who stop revising their annual earnings forecasts. This measure predicts negative earnings surprises and negative price reaction around earnings announcements. It could also be used to generate profitable trading strategies. I show that institutions tend to sell their stock holdings as my measure of unreported negative news increases, thus ameliorating the mispricing.

G12, G14, G20

Abstract:
We present evidence of inefficient information processing in equity markets by documenting that negative information withheld by securities analysts is reflected in stock prices with a significant delay. We estimate the extent of the withheld negative information based on the proportion of analysts who stop revising their annual earnings forecasts. This measure predicts negative earnings surprises and negative price reaction around earnings announcements. It could also be used to generate profitable trading strategies. We show that institutions tend to sell their stock holdings as our measure of unreported negative news increases, thus ameliorating the mispricing.

analyst incentives, dropped coverage, mispricing, earnings surprises

Abstract:
The equilibrium magnitude of mispricing can be no greater than the cost of arbitraging it away. Yet, mispricing typically arises when the uncertainty about a firm is high, which is precisely when the stock's liquidity is low. This is the case for stocks with high analyst disagreement about future earnings. These stocks tend to be overpriced, with prices converging down as the uncertainty about earnings is resolved, but the stocks' low liquidity suggests that transaction costs significantly reduce the potential arbitrage profits. Positive shocks to market-wide liquidity reduce arbitrage costs and accelerate the convergence of prices to fundamentals.

limits to arbitrage, liquidity, analyst disagreement

Abstract:
We construct nominal and CPI-adjusted hedonic real estate price indices for Manhattan from 1920 to 1939 using a unique dataset of market transactions. The CPI-adjusted index falls during the recession that followed the First World War, but then rises quickly to a peak in 1926. It subsequently declines again, following the collapse of the Florida real estate bubble, but eventually recovers to reach the highest peak in the third quarter of 1929. It then falls by 74 percent to reach a new low at the end of 1932 and hovers around that value until the end of the 1930s. A typical house bought in the beginning of 1920 would have retained only 41 percent of its initial value two decades later.

Real estate, price index, Great Depression

Abstract:
This study demonstrates that the U.S. equity premium has declined significantly during the last three decades. The study calculates the equity premium using a variation of a formula in the classic Gordon stock valuation model. The calculation includes the bond yield, the stock dividend yield, and the expected dividend growth rate, which in this formulation can change over time. The study calculates the premium for several measures of the aggregate U.S. stock portfolio and several assumptions about bond yields and stock dividends and gets basically the same result. The premium averaged about 7 percentage points during 1926 70 and only about 0.7 of a percentage point after that. This result is shown to be reasonable by demonstrating the roughly equal returns that investments in stocks and consol bonds of the same duration would have earned between 1982 and 1999, years when the equity premium is estimated to have been zero.

Abstract:
We provide evidence that stocks with higher dispersion in analysts' earnings forecasts earn lower future returns than otherwise similar stocks. This effect is most pronounced in small stocks, and stocks that have performed poorly over the past year. Interpreting dispersion in analysts' forecasts as a proxy for differences in opinion about a stock, we show that this evidence is consistent with the hypothesis that prices will reflect the optimistic view whenever investors with the lowest valuations do not trade. By contrast, our evidence is inconsistent with a view that dispersion in analysts' forecasts proxies for risk.

analyst forecasts, dispersion, differences of opinion, stock returns