Does Disagreement Facilitate Informed Trading? Evidence from Activist Investors
50 Pages Posted: 18 Feb 2021 Last revised: 12 Apr 2021
Date Written: April 12, 2021
We study the effect of investor disagreement on informed trading by activist investors using high-frequency disagreement data derived from the investor social network StockTwits. Greater investor disagreement leads to more trading in the subsequent day by privately-informed activists. Disagreement leads to higher prices and improvements in measured liquidity, but these observed valuation and market liquidity differences do not explain the increase in activist trading. Instead, investor disagreement affects activist trading primarily by facilitating trading by non-activist investors. These findings suggest that investor disagreement not only affects trading by uninformed investors, but also facilitates trading by informed market participants who often take actions aimed at changing corporate policies.
Keywords: disagreement, informed trading, activist investors
JEL Classification: G02, G14, G34
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