Disagreement About Fundamentals: Measurement and Consequences

50 Pages Posted: 31 Jan 2020

See all articles by Paul E. Fischer

Paul E. Fischer

University of Pennsylvania - Accounting Department

Chongho Kim

New York University

Frank Zhou

University of Pennsylvania - The Wharton School

Date Written: January 6, 2020

Abstract

We propose a measure of disagreement among investors (i.e., differences of opinion as opposed to information asymmetry) based on analyst earnings forecasts. Our measure relies on the notion that when analysts agree, the law of iterated expectations applies and a regression of an analyst's forecast on the previous forecast issued by another analyst should produce a slope coefficient of one. Using existing metrics reflecting belief dispersion, we provide evidence that generally validates our measure. Finally, we employ our measure to test for associations between disagreement and expected returns predicted by antecedent theoretical studies, which suggest that disagreement can influence expected returns by altering investor perceptions of uncertainty. Consistent with disagreement increasing perceptions of priced uncertainty on average, we document a positive association between disagreement and expected returns.

Keywords: Disagreement, Divergence of Opinion, Expected Returns, Disclosures

JEL Classification: G14, M41

Suggested Citation

Fischer, Paul E. and Kim, Chongho and Zhou, Frank, Disagreement About Fundamentals: Measurement and Consequences (January 6, 2020). Available at SSRN: https://ssrn.com/abstract=3515685 or http://dx.doi.org/10.2139/ssrn.3515685

Paul E. Fischer

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Chongho Kim

New York University ( email )

40 West 4th Street
Suite 10-180
New York, NY 10012
United States
5129987313 (Phone)

Frank Zhou (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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