The Distribution of Investor Beliefs, Stock Ownership and Stock Returns
Gikas Hardouvelis, Georgios Karalas, Dimitri Vayanos
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.
JEL: G10, G11, G12, G23
Keywords: Diﬀerences of opinion, polarization, stock ownership, return predictability