The Distribution of Investor Beliefs, Stock Ownership and Stock Returns

42 Pages Posted: 12 Apr 2021

See all articles by Gikas A. Hardouvelis

Gikas A. Hardouvelis

University of Piraeus; Centre for Economic Policy Research (CEPR)

Georgios Karalas

University Carlos III of Madrid

Dimitri Vayanos

London School of Economics; Center for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: April 12, 2021

Abstract

We study theoretically and empirically the relationship between investor beliefs, ownership dispersion and stock returns. We find that high dispersion, measured by high breadth or low Herfindahl index, forecasts returns positively for large stocks, as in Chen, Hong, and Stein (2002), but negatively for small stocks. We explain that relationship in a difference-of-opinion model in which stocks differ in the size of investor disagreements and the extent of belief polarization. These differences are characterized by range and kurtosis, respectively. Proxying investor beliefs by analyst forecasts, we find that range and kurtosis affect ownership dispersion in the way that our model predicts.

Keywords: Differences of opinion, polarization, stock ownership, return predictability

JEL Classification: G10, G11, G12, G23

Suggested Citation

Hardouvelis, Gikas A. and Karalas, Georgios and Vayanos, Dimitri, The Distribution of Investor Beliefs, Stock Ownership and Stock Returns (April 12, 2021). Available at SSRN: https://ssrn.com/abstract=3824433 or http://dx.doi.org/10.2139/ssrn.3824433

Gikas A. Hardouvelis

University of Piraeus ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece
+32010 4142323 (Phone)
+3210 6724848 (Fax)

HOME PAGE: http://www.eurobank.gr

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Georgios Karalas (Contact Author)

University Carlos III of Madrid ( email )

Calle de Madrid 126
Madrid - Getafe, 28903
Spain

HOME PAGE: http://https://business.uc3m.es/en/faculty/profesor/perfil/georgios-karalas

Dimitri Vayanos

London School of Economics ( email )

A350
Houghton Street
London WC2A 2AE
United Kingdom
+44 (0)20 7955 6382 (Phone)
+44 (0)20 7955 7420 (Fax)

Center for Economic Policy Research (CEPR)

London
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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