IDEAS home Printed from https://ideas.repec.org/a/spr/reaccs/v27y2022i4d10.1007_s11142-021-09627-3.html
   My bibliography  Save this article

Disagreement about fundamentals: measurement and consequences

Author

Listed:
  • Paul Fischer

    (University of Pennsylvania)

  • Chongho Kim

    (New York University)

  • Frank Zhou

    (University of Pennsylvania)

Abstract

We propose a measure of disagreement, which reflects differences of opinion as opposed to information asymmetry, that can be extracted from sequences of analyst forecasts. Using a Bayesian theoretical framework, we prove that when analysts agree, a regression of an analyst’s forecast on the previous forecast issued by another analyst should have a slope coefficient of one. The magnitude of the estimated regression coefficient’s deviation from one is then employed as a disagreement measure. We validate the measure using tests tied to predicted relations between disagreement and trading volume and bid-ask spreads. Finally, we employ our measure to test for associations between disagreement and expected returns predicted by antecedent theoretical studies.

Suggested Citation

  • Paul Fischer & Chongho Kim & Frank Zhou, 2022. "Disagreement about fundamentals: measurement and consequences," Review of Accounting Studies, Springer, vol. 27(4), pages 1423-1456, December.
    • Handle: RePEc:spr:reaccs:v:27:y:2022:i:4:d:10.1007_s11142-021-09627-3
    DOI: 10.1007/s11142-021-09627-3
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11142-021-09627-3
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11142-021-09627-3?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Harrison Hong & Jeremy C. Stein, 2007. "Disagreement and the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 109-128, Spring.
    2. Wang, Huijun & Yan, Jinghua & Yu, Jianfeng, 2017. "Reference-dependent preferences and the risk–return trade-off," Journal of Financial Economics, Elsevier, vol. 123(2), pages 395-414.
    3. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-1168, September.
    4. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
    5. Frank S. Zhou & Yuqing Zhou, 2020. "The Dog that Did Not Bark: Limited Price Efficiency and Strategic Nondisclosure," Journal of Accounting Research, Wiley Blackwell, vol. 58(1), pages 155-197, March.
    6. Gervais, Simon & Odean, Terrance, 2001. "Learning to be Overconfident," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 1-27.
    7. Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2113-2141, October.
    8. X. Frank Zhang, 2006. "Information Uncertainty and Stock Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 105-137, February.
    9. Amitabh Dugar & Siva Nathan, 1995. "The Effect of Investment Banking Relationships on Financial Analysts' Earnings Forecasts and Investment Recommendations," Contemporary Accounting Research, John Wiley & Sons, vol. 12(1), pages 131-160, September.
    10. Morgan, John & Stocken, Phillip C, 2003. "An Analysis of Stock Recommendations," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 183-203, Spring.
    11. Joon Chae, 2005. "Trading Volume, Information Asymmetry, and Timing Information," Journal of Finance, American Finance Association, vol. 60(1), pages 413-442, February.
    12. Ang, Andrew & Hodrick, Robert J. & Xing, Yuhang & Zhang, Xiaoyan, 2009. "High idiosyncratic volatility and low returns: International and further U.S. evidence," Journal of Financial Economics, Elsevier, vol. 91(1), pages 1-23, January.
    13. Péter Kondor, 2012. "The More We Know about the Fundamental, the Less We Agree on the Price," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(3), pages 1175-1207.
    14. Hirshleifer, David & Daniel, Kent, 2015. "Overconfident investors, predictable returns, and excessive trading," MPRA Paper 69002, University Library of Munich, Germany.
    15. Kandel, Eugene & Pearson, Neil D, 1995. "Differential Interpretation of Public Signals and Trade in Speculative Markets," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 831-872, August.
    16. Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2006. "The Cross‐Section of Volatility and Expected Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 259-299, February.
    17. Snehal Banerjee & Ron Kaniel & Ilan Kremer, 2009. "Price Drift as an Outcome of Differences in Higher-Order Beliefs," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3707-3734, September.
    18. So, Eric C., 2013. "A new approach to predicting analyst forecast errors: Do investors overweight analyst forecasts?," Journal of Financial Economics, Elsevier, vol. 108(3), pages 615-640.
    19. Mark Grinblatt & Matti Keloharju, 2009. "Sensation Seeking, Overconfidence, and Trading Activity," Journal of Finance, American Finance Association, vol. 64(2), pages 549-578, April.
    20. Beneish, M.D. & Lee, C.M.C. & Nichols, D.C., 2015. "In short supply: Short-sellers and stock returns," Journal of Accounting and Economics, Elsevier, vol. 60(2), pages 33-57.
    21. Lee, Charles M.C. & So, Eric C., 2017. "Uncovering expected returns: Information in analyst coverage proxies," Journal of Financial Economics, Elsevier, vol. 124(2), pages 331-348.
    22. Leuz, C & Verrecchia, RE, 2000. "The economic consequences of increased disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 38, pages 91-124.
    23. Travis L Johnson & Jinhwan Kim & Eric C So & Lauren Cohen, 2020. "Expectations Management and Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 33(10), pages 4580-4626.
    24. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
    25. Kent Daniel & David Hirshleifer, 2015. "Overconfident Investors, Predictable Returns, and Excessive Trading," Journal of Economic Perspectives, American Economic Association, vol. 29(4), pages 61-88, Fall.
    26. Mark T. Bradshaw & Richard G. Sloan, 2002. "GAAP versus The Street: An Empirical Assessment of Two Alternative Definitions of Earnings," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 41-66, March.
    27. Snehal Banerjee & Ilan Kremer, 2010. "Disagreement and Learning: Dynamic Patterns of Trade," Journal of Finance, American Finance Association, vol. 65(4), pages 1269-1302, August.
    28. Frank L. Heflin & Kenneth W. Shaw & John J. Wild, 2005. "Disclosure Policy and Market Liquidity: Impact of Depth Quotes and Order Sizes," Contemporary Accounting Research, John Wiley & Sons, vol. 22(4), pages 829-865, December.
    29. Avramov, Doron & Chordia, Tarun & Jostova, Gergana & Philipov, Alexander, 2009. "Dispersion in analysts' earnings forecasts and credit rating," Journal of Financial Economics, Elsevier, vol. 91(1), pages 83-101, January.
    30. Russell Lundholm & Rafael Rogo, 2020. "Do excessively volatile forecasts impact investors?," Review of Accounting Studies, Springer, vol. 25(2), pages 636-671, June.
    31. Karthik Balakrishnan & Mary Brooke Billings & Bryan Kelly & Alexander Ljungqvist, 2014. "Shaping Liquidity: On the Causal Effects of Voluntary Disclosure," Journal of Finance, American Finance Association, vol. 69(5), pages 2237-2278, October.
    32. Snehal Banerjee, 2011. "Learning from Prices and the Dispersion in Beliefs," Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 3025-3068.
    33. Goetzmann, William N. & Massa, Massimo, 2005. "Dispersion of opinion and stock returns," Journal of Financial Markets, Elsevier, vol. 8(3), pages 324-349, August.
    34. Robert Bloomfield & Paul E. Fischer, 2011. "Disagreement and the Cost of Capital," Journal of Accounting Research, Wiley Blackwell, vol. 49(1), pages 41-68, March.
    35. Michael Clement & Richard Frankel & Jeffrey Miller, 2003. "Confirming Management Earnings Forecasts, Earnings Uncertainty, and Stock Returns," Journal of Accounting Research, Wiley Blackwell, vol. 41(4), pages 653-679, September.
    36. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
    37. Timothy C. Johnson, 2004. "Forecast Dispersion and the Cross Section of Expected Returns," Journal of Finance, American Finance Association, vol. 59(5), pages 1957-1978, October.
    38. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
    39. Jon A. Garfinkel, 2009. "Measuring Investors' Opinion Divergence," Journal of Accounting Research, Wiley Blackwell, vol. 47(5), pages 1317-1348, December.
    40. Brad M. Barber & Terrance Odean, 2001. "Boys will be Boys: Gender, Overconfidence, and Common Stock Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 261-292.
    41. Scott Richardson & Siew Hong Teoh & Peter D. Wysocki, 2004. "The Walk†down to Beatable Analyst Forecasts: The Role of Equity Issuance and Insider Trading Incentives," Contemporary Accounting Research, John Wiley & Sons, vol. 21(4), pages 885-924, December.
    42. Jon A. Garfinkel & Jonathan Sokobin, 2006. "Volume, Opinion Divergence, and Returns: A Study of Post–Earnings Announcement Drift," Journal of Accounting Research, Wiley Blackwell, vol. 44(1), pages 85-112, March.
    43. Ronnie Sadka & Anna Scherbina, 2007. "Analyst Disagreement, Mispricing, and Liquidity," Journal of Finance, American Finance Association, vol. 62(5), pages 2367-2403, October.
    44. Abarbanell, Jeffery S. & Lanen, William N. & Verrecchia, Robert E., 1995. "Analysts' forecasts as proxies for investor beliefs in empirical research," Journal of Accounting and Economics, Elsevier, vol. 20(1), pages 31-60, July.
    45. J. Michael Harrison & David M. Kreps, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 92(2), pages 323-336.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. ED deHAAN & NAN LI & FRANK S. ZHOU, 2023. "Financial Reporting and Employee Job Search," Journal of Accounting Research, Wiley Blackwell, vol. 61(2), pages 571-617, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yen‐Cheng Chang & Pei‐Jie Hsiao & Alexander Ljungqvist & Kevin Tseng, 2022. "Testing Disagreement Models," Journal of Finance, American Finance Association, vol. 77(4), pages 2239-2285, August.
    2. Qian, Xiaolin, 2014. "Small investor sentiment, differences of opinion and stock overvaluation," Journal of Financial Markets, Elsevier, vol. 19(C), pages 219-246.
    3. Gao, George P. & Lu, Xiaomeng & Song, Zhaogang & Yan, Hongjun, 2019. "Disagreement beta," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 96-113.
    4. Banerjee, Snehal & Green, Brett, 2015. "Signal or noise? Uncertainty and learning about whether other traders are informed," Journal of Financial Economics, Elsevier, vol. 117(2), pages 398-423.
    5. Wei Xiong, 2013. "Bubbles, Crises, and Heterogeneous Beliefs," NBER Working Papers 18905, National Bureau of Economic Research, Inc.
    6. Hillert, Alexander & Jacobs, Heiko & Müller, Sebastian, 2018. "Journalist disagreement," Journal of Financial Markets, Elsevier, vol. 41(C), pages 57-76.
    7. Sheng, Xuguang (Simon) & Thevenot, Maya, 2015. "Quantifying differential interpretation of public information using financial analysts’ earnings forecasts," International Journal of Forecasting, Elsevier, vol. 31(2), pages 515-530.
    8. Adem Atmaz & Suleyman Basak, 2018. "Belief Dispersion in the Stock Market," Journal of Finance, American Finance Association, vol. 73(3), pages 1225-1279, June.
    9. Hirota, Shinichi, 2023. "Money supply, opinion dispersion, and stock prices," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 1286-1310.
    10. Caglayan, Mustafa & Pham, Tho & Talavera, Oleksandr & Xiong, Xiong, 2020. "Asset mispricing in peer-to-peer loan secondary markets," Journal of Corporate Finance, Elsevier, vol. 65(C).
    11. Andreou, Panayiotis C. & Kagkadis, Anastasios & Philip, Dennis & Tuneshev, Ruslan, 2018. "Differences in options investors’ expectations and the cross-section of stock returns," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 315-336.
    12. Armstrong, Will J. & Cardella, Laura & Sabah, Nasim, 2021. "Information shocks, disagreement, and drift," Journal of Financial Economics, Elsevier, vol. 140(3), pages 916-940.
    13. Chen, Tao, 2020. "Does news affect disagreement in global markets?," Journal of Business Research, Elsevier, vol. 109(C), pages 174-183.
    14. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, vol. 24(1), pages 34-75.
    15. Al-Nasseri, Alya & Menla Ali, Faek, 2018. "What does investors' online divergence of opinion tell us about stock returns and trading volume?," Journal of Business Research, Elsevier, vol. 86(C), pages 166-178.
    16. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    17. Ling Cen & K. C. John Wei & Liyan Yang, 2017. "Disagreement, Underreaction, and Stock Returns," Management Science, INFORMS, vol. 63(4), pages 1214-1231, April.
    18. Hu, Yingyi & Zhao, Tiao & Zhang, Lin, 2020. "Noise trading, institutional trading, and opinion divergence: Evidence on intraday data in the Chinese stock market," International Review of Economics & Finance, Elsevier, vol. 68(C), pages 74-89.
    19. Xuguang Sheng & Maya Thevenot, 2013. "Differential Interpretation of Public Information: Estimation and Inference," Working Papers 2013-03, American University, Department of Economics.
    20. Junjun Ma & Xindan Li & Lei Lu & Weixing Wu & Xiong Xiong, 2022. "Individual investors' dispersion in beliefs and stock returns," Financial Management, Financial Management Association International, vol. 51(3), pages 929-953, September.

    More about this item

    Keywords

    Disagreement; Divergence of opinion; Expected returns; Analyst forecasts;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:reaccs:v:27:y:2022:i:4:d:10.1007_s11142-021-09627-3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.