Disagreement, Speculation and Management Forecasts

63 Pages Posted: 28 Apr 2020

See all articles by Valentin Dimitrov

Valentin Dimitrov

Rutgers, The State University of New Jersey - Accounting & Information Systems

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics; Columbia University - Law School

Zhiwei Xu

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: March 2020

Abstract

Prior research shows that disagreement leads to speculative trading and a speculative premium in stock prices. We examine how managers respond to this speculative premium. Using exogenous variation in speculative trading due to the reconstitution of the Russell 1000/2000 indices, we find that speculative trading reduces the frequency, likelihood, and precision of management forecasts. Consistent with theory, this relationship is significantly stronger when short sale constraints are more binding, and when managers have stronger equity-based incentives. We also find that managers sell equity to benefit from the speculative premium. In summary, our results suggest that managers issue forecasts opportunistically in response to speculative trading: they either keep silent, or issue fewer and more ambiguous forecasts to prolong disagreement among investors and the speculative premium.

Keywords: Speculation, Disagreement, Management Forecasts, Stock Prices, Short Sale Constraints, Speculative Trading

JEL Classification: C50, G12, G14, M41

Suggested Citation

Dimitrov, Valentin and Palia, Darius and Xu, Zhiwei, Disagreement, Speculation and Management Forecasts (March 2020). Available at SSRN: https://ssrn.com/abstract=3567139 or http://dx.doi.org/10.2139/ssrn.3567139

Valentin Dimitrov

Rutgers, The State University of New Jersey - Accounting & Information Systems ( email )

1 Washington Park
Newark, NJ 07102
United States

Darius Palia (Contact Author)

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics ( email )

111 Washington Street
MEC 134
Newark, NJ 07102
United States
973-353-5981 (Phone)
973-353-1233 (Fax)

Columbia University - Law School ( email )

435 W 116th St.
New York, NY 10027
United States

Zhiwei Xu

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

Janice H. Levin Bldg., Room 121
94 Rockafeller Road
Piscataway, NJ 08854-8054
United States

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