Informed Agents, Disagreement and Price Discovery

Abstract:     
I analyze the effects of analysts, institutions, and insiders on price discovery. Due to differing environments, insiders are more informative at longer (12-month) versus shorter (6-month) horizons, and vice-versa for analysts and institutions. When disagreement exists, I find that each group’s informativeness is not only a function of its own signal strength, but also the collective weakness of its counterparts’ signals.

In addition, I find informational advantages for insiders and analysts to be type-dependent. Specifically, insiders(analysts) derive predictive abilities solely from firm-specific(industry-specific) information, with neither party being able to take advantage of informational inefficiencies outside of their specialized area.

Keywords: information intermediaries, analyst, recommendations, insider trading, institutional investors, money managers, momentum, contrarian, behavioral finance, price discovery, market efficiency, disagreement, FERC, future earnings response coefficient, PIN, synchronicity

JEL Classifications: D82, G12, G14, G21, G24, G29, M41

Working Paper Series