Does Disagreement Facilitate Informed Trading?

Abstract

Using high-frequency disagreement data from the investor social network StockTwits, we find that greater investor disagreement facilitates informed trading by activists and short sellers. These findings are unexplained by sentiment, news and retail order flow, and they remain when we measure disagreement overnight, which alleviates concern that disagreement and informed trading respond to a common shock. When short selling is costly, the facilitating effect of disagreement on trading is dampened for informed buyers but is amplified for sellers. These findings suggest that informed traders respond meaningfully to valuation changes induced by disagreement.

Keywords: disagreement, informed trading, short sellers, insider trading, activist investors

JEL Classification: G02, G14, G34