The More We Know About Fundamentals, the Less We Agree on Price: Evidence from Earnings Announcements

51 Pages Posted: 15 Mar 2017

See all articles by Lindsey A. Gallo

Lindsey A. Gallo

University of Michigan, Stephen M. Ross School of Business

Date Written: March 7, 2017

Abstract

Can an earnings announcement decrease disagreement about fundamentals while simultaneously increasing disagreement about price? Recent theory suggests the presence of short-horizon investors can lead to a polarization of higher-order beliefs about price (i.e., beliefs regarding the opinions of other investors), even as a public announcement reduces disagreement about fundamentals. Using analyst forecast dispersion and implied volatility to proxy for differences of opinion about fundamentals and price, respectively, I find a positive association between the presence of speculative traders and both the likelihood and extent of divergence between changes in price disagreement and earnings disagreement around earnings announcements characterized by decreasing forecast dispersion. Further, using abnormal announcement period volume to measure disagreement about price, I continue to document a positive association between speculation and the extent of divergence. Taken together, these results suggest that higher-order beliefs play an important role in assessing the informativeness of earnings announcements.

Keywords: Higher-order beliefs, disagreement, investor horizon, earnings announcements, volume

JEL Classification: C72, G12, G14, G32, M41

Suggested Citation

Gallo, Lindsey A., The More We Know About Fundamentals, the Less We Agree on Price: Evidence from Earnings Announcements (March 7, 2017). Available at SSRN: https://ssrn.com/abstract=2932459 or http://dx.doi.org/10.2139/ssrn.2932459

Lindsey A. Gallo (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
7347648243 (Phone)

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