Is Difference of Opinion Among Investors a Source of Risk?

Abstract

This paper examines the relationship between difference of opinion among investors and the return on Australian equities. The paper is the first to employ both dispersion in analysts' earnings forecasts and maximum share turnover as proxies for difference of opinion among investors. We also investigate whether difference of opinion can explain the value anomaly. Our findings show that (a) difference of opinion is negatively related to stock returns and (b) it cannot explain the value anomaly. Our findings are consistent with Diether, Malloy, and Scherbina (2002) and provide strong support for Miller (1977). We reject the risk-based argument advanced by Doukas, Kim and Pantzalis (2004).

Keywords: Multifactor Model, Difference of Opinion, Analysts' Earnings Forecasts, Maximum Share Turnover, Value Anomaly

JEL Classification: G10, G12, G15