Offsetting disagreement and security prices

Huang, Shiyang, Hwang, Byoung-Hyoun, Lou, Dong ORCID: 0000-0002-5623-4338 and Yin, Chengxi (2020) Offsetting disagreement and security prices. Management Science, 66 (8). 3444 - 3465. ISSN 0025-1909

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Abstract

We propose that investor beliefs frequently “cross” in the sense that an investor may like company A but dislike company B, whereas another investor may like company B but dislike company A. Such belief-crossing makes it almost impossible to construct a portfolio that is composed solely of every investor’s most favored companies. This causes the level of excitement for portfolios to be generally lower than the levels of excitement that individual companies generate among their most fervent supporters. Coupled with short-sale constraints, wherein prices are set by the most optimistic investors, this causes portfolios to trade at discounts. Utilizing several settings whereby the value of a portfolio and the values of the underlying components can be evaluated separately (e.g., closed-end funds), we present evidence supporting our proposition that, in financial markets, the “whole” is often less than the “sum of its parts.”

Item Type:	Article
Official URL:	https://pubsonline.informs.org/journal/mnsc
Additional Information:	© 2020 INFORMS
Divisions:	Finance
Subjects:	H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management H Social Sciences > HG Finance
Date Deposited:	08 Jul 2019 15:30
Last Modified:	12 Dec 2024 01:48
URI:	http://eprints.lse.ac.uk/id/eprint/101135

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