Disagreement About Fundamentals: Measurement and Consequences
50 Pages Posted: 31 Jan 2020
Date Written: January 6, 2020
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: Suggested Citation