Opinion Divergence Among Professional Investment Managers

Authors

  • Gang Hu,

    1. The first author is Assistant Professor of Finance at Babson College, MA. The second author is Assistant Professor of Finance, Department of Business Administration, Stonehill College, MA. The third author is Associate Professor of Finance, Babson College, MA.
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  • J. Ginger Meng,

    1. The first author is Assistant Professor of Finance at Babson College, MA. The second author is Assistant Professor of Finance, Department of Business Administration, Stonehill College, MA. The third author is Associate Professor of Finance, Babson College, MA.
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  • Mark E. Potter

    Corresponding author
    1. The first author is Assistant Professor of Finance at Babson College, MA. The second author is Assistant Professor of Finance, Department of Business Administration, Stonehill College, MA. The third author is Associate Professor of Finance, Babson College, MA.
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  • They are grateful for the many suggestions from the editor Andrew Stark and an anonymous referee that significantly improved the paper. The authors thank David McLean for contributing to an early version of the paper. For helpful comments and discussions, they thank Ashiq Ali, Pierluigi Balduzzi, Sudipta Basu, Alex Butler, David Chapman, Thomas Chemmanur, Jennifer Conrad, Ryan Davies, Ying Duan, Wayne Ferson, Aloke Ghosh, Denys Glushkov, Michael Goldstein, Wayne Landsman, Mark Liu, Alan Marcus, Jeff Pontiff, Brian Rountree, Yun Shen, Tim Simin, Earl Stice, Robert Taggart, Paula Tkac, Bob Wood, Steven Young, and seminar participants at Boston College, the 2007 JBFA Capital Markets Conference at UNC-Chapel Hill, the 2005 Southern Finance Association meeting at Key West, and the 2004 Financial Management Association meeting at New Orleans. They thank Abel/Noser Corporation for providing the institutional trading data. All remaining errors and omissions are the authors own.

* Address for correspondence: Gang Hu, Assistant Professor of Finance, Babson College, 121 Tomasso Hall, Babson Park, MA 02457, USA.
e-mail: ghu@babson.edu

Abstract

Abstract:  We find that opinion divergence among professional investment managers is commonplace, using a large sample of transaction-level institutional trading data. When managers trade together, future returns are similar regardless if they are all buying or selling, inconsistent with the notion that professional investment managers possess stock picking ability or private information that is of investment value. However, when managers trade against each other, subsequent returns are low, especially for stocks that are difficult to short. This U-shaped disagreement-return relationship is consistent with Miller's (1977) hypothesis that, in the presence of short-sale constraints, opinion divergence can cause an upward bias in prices.

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