Differences of Opinion and Stock Prices: Evidence Based on Revealed Preferences

62 Pages Posted: 26 Jul 2015 Last revised: 27 Dec 2016

See all articles by Tara Bhandari

Tara Bhandari

U. S. Securities and Exchange Commission

Date Written: November 26, 2016

Abstract

I construct a novel measure of differences of opinion based on investor holdings data which isolates the type of disagreement that is theoretically predicted to affect prices when assets are bundled or unbundled. Empirically, using the setting of corporate spin-offs, I show that differences of opinion about the two entities being separated are, as predicted, related to a significantly more positive event return. Because I focus on ex date returns, these findings cannot be explained by risk, uncertainty or the expected business impacts of the transactions. Placebo tests provide further support that other factors are not driving the results. Additional tests using mergers and closed-end funds provide consistent results, and altogether these findings provide new insight into the attribution of value created when bundling or unbundling assets.

Keywords: differences of opinion, heterogeneous beliefs, spin-offs, mergers

JEL Classification: G14, G34, G12

Suggested Citation

Bhandari, Tara, Differences of Opinion and Stock Prices: Evidence Based on Revealed Preferences (November 26, 2016). Available at SSRN: https://ssrn.com/abstract=2635690 or http://dx.doi.org/10.2139/ssrn.2635690

Tara Bhandari (Contact Author)

U. S. Securities and Exchange Commission ( email )

100 F Street NE
Washington, DC 20549
United States

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