Offsetting Disagreement and Security Prices

43 Pages Posted: 3 Feb 2014 Last revised: 23 Aug 2017

See all articles by Byoung-Hyoun Hwang

Byoung-Hyoun Hwang

Cornell University - Dyson School of Applied Economics and Management; Korea University - Department of Finance

Dong Lou

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Chengxi (Adam) Yin

Renmin University of China

Multiple version iconThere are 2 versions of this paper

Date Written: August 22, 2017

Abstract

We propose that investors are generally less excited about portfolios than they are about the individual companies in those portfolios. The reason is that companies liked by some investors are often not liked by other investors. This makes it almost impossible to construct a portfolio that perfectly pleases large groups of investors and contains (only) every investor’s most favorite companies. The maximum level of excitement that a portfolio of companies receives from investors, therefore, is almost always less than the sum of the level of excitement that the individual companies in the portfolio receive from their most fervent supporters. In the presence of binding short-sale constraints, wherein prices are set by the most optimistic investors, this difference in the level of excitement can become priced. Utilizing closed-end funds, exchange-traded funds, mergers and acquisitions, and conglomerates in which the value of the aggregate portfolio and the values of the underlying components can be separately evaluated, we present evidence supporting our proposition.

Keywords: Investor Disagreement, Belief Crossing, Portfolio Discounts

JEL Classification: G11, G12, G14, G20

Suggested Citation

Hwang, Byoung-Hyoun and Lou, Dong and Yin, Chengxi, Offsetting Disagreement and Security Prices (August 22, 2017). Available at SSRN: https://ssrn.com/abstract=2389730 or http://dx.doi.org/10.2139/ssrn.2389730

Byoung-Hyoun Hwang (Contact Author)

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

HOME PAGE: http://www.bhwang.com

Korea University - Department of Finance

Seoul, 136-701
United States

Dong Lou

London School of Economics & Political Science (LSE) ( email )

Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)207 1075360 (Phone)

HOME PAGE: http://personal.lse.ac.uk/loud/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Chengxi Yin

Renmin University of China ( email )

59 Zhongguancun Street
Beijing
China

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