Dispersion in Beliefs among Active Mutual Funds and the Cross-Section of Stock Returns
62 Pages Posted: 12 Nov 2011 Last revised: 16 Sep 2013
Date Written: January 16, 2012
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.
Keywords: Mutual Funds, Private Information, Dispersion in Beliefs, Short-Sale Constraints, Asymmetric Information
JEL Classification: G10, G11, G12, G14
Suggested Citation: Suggested Citation