Dispersion in Beliefs among Active Mutual Funds and the Cross-Section of Stock Returns
Michigan State University
University of California, Irvine - Paul Merage School of Business
January 16, 2012
AFA 2013 San Diego Meetings Paper
Journal of Financial Economics (JFE), Forthcoming
We propose a measure of dispersion in fund managersbeliefs about future stock returns based on their active holdings, i.e., deviations from benchmarks. We fi nd that both the level of and the change in dispersion positively predict subsequent stock returns on a risk-adjusted basis. This effect is particularly pronounced among stocks with high information asymmetry and binding short-sale constraints. These results suggest that a subgroup of informed managers drive up the dispersion in active holdings when they place large bets after receiving positive private information. Binding short-sale constraints, however, prevent them from fully using their negative private information, leading to low dispersion in active holdings.
Number of Pages in PDF File: 62
Keywords: Mutual Funds, Private Information, Dispersion in Beliefs, Short-Sale Constraints, Asymmetric Information
JEL Classification: G10, G11, G12, G14Accepted Paper Series
Date posted: November 12, 2011 ; Last revised: September 16, 2013
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