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

Hao Jiang

Michigan State University

Zheng Sun

University of California, Irvine - Paul Merage School of Business

Date Written: January 16, 2012

Abstract

We propose a measure of dispersion in fund managers’beliefs 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

Jiang, Hao and Sun, Zheng, Dispersion in Beliefs among Active Mutual Funds and the Cross-Section of Stock Returns (January 16, 2012). AFA 2013 San Diego Meetings Paper; Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1958179 or http://dx.doi.org/10.2139/ssrn.1958179

Hao Jiang

Michigan State University ( email )

315 Eppley Center
Department of Finance
East Lansing, MI 48824
United States

HOME PAGE: http://sites.google.com/site/haojiangfinance/

Zheng Sun (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

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