Journal: Management Science
Gikas Hardouvelis,a,b Georgios Karalas,c Dimitri Vayanosb,d,e,*
a Department of Finance, University of Piraeus, 18534 Piraeus, Greece; b Centre for Economic Policy Research, 75007 Paris, France;
c Independent Researcher; d National Bureau of Economic Research, Cambridge, Massachusetts 02138; eDepartment of Finance,
London School of Economics, London WC2A 2AE, United Kingdom
*Corresponding author
Contact: ghardouv@unipi.gr (GH); karalas.georgios@gmail.com (GK); d.vayanos@lse.ac.uk, https://orcid.org/0000-0002-0944-4914 (DV)
Abstract
We study the relationship between the distribution of investor beliefs, the breadth of ownership, and expected returns in a model where stocks differ in the intensity of disagreement
and in the extent to which beliefs are polarized, as measured by the number of optimists and pessimists relative to moderates. Polarization explains the size-dependent relationship
between breadth and expected returns that we find empirically: positive for large stocks and negative for small stocks. We also find empirical support for the underlying mechanism:
polarized stocks earn lower expected returns and are held more broadly if small and less broadly if large.
https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2022.02027
