Testing Disagreement Models
57 Pages Posted: 5 Dec 2019 Last revised: 20 Apr 2020
Date Written: April 18, 2020
We provide plausibly identified evidence for the role of investor disagreement in asset pricing. Our natural experiment exploits the staggered implementation of EDGAR, which induces a reduction in investor disagreement with no accompanying changes in company fundamentals, disclosure quality, or earnings management. The reduction in disagreement leads to lower stock price crash risk. The effect is more pronounced for stocks with binding short-sale constraints and high investor optimism. The reduction in disagreement also leads to higher subsequent returns. Our results provide evidence consistent with models of investor disagreement.
Keywords: investor disagreement, crash risk, EDGAR, behavioral finance
JEL Classification: G02, G12
Suggested Citation: Suggested Citation