Disagreement, Speculation and Management Forecasts

65 Pages Posted: 28 Apr 2020 Last revised: 7 Jun 2022

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 1, 2020

Abstract

We examine the properties of management forecasts in the presence of disagreement-based speculation. We construct a novel measure of speculative trading and confirm it is strongly positively related to equity overvaluation. For identification, we use exogenous variation in speculative trading around the reconstitution of the Russell 1000/2000 indices. Using this approach, we document a strong negative effect of speculative trading on the frequency and likelihood of management forecasts. The effect is stronger when arbitrage is costlier and stronger still when managers have more equity-based incentives. We also find that managers sell their own equity and issue more stock to benefit from speculative trading, suggesting that managers are aware of the link between speculation and mispricing. For firms issuing forecasts, managers issue less precise and more optimistic forecasts when speculative trading is higher. Our results suggest that in the presence of disagreement-based speculative trading, managers choose to “not rock the boat” with any incremental news about fundamentals to prolong the disagreement among investors and the resulting equity overvaluation.

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 1, 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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