What is it about?
In an imperfectly competitive market, an increase in diversity of investor beliefs about payoffs can increase or decrease stock returns, depending on whether the total information in the economy also grows or stays the same.
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Why is it important?
Shows the importance of whether the total information in the economy is the same. By ignoring this 40 years of empirical research has been completely inconclusive.
Perspectives
40+ years of email research into the relationship between stock returns and the diversity of investor beliefs has been inclusive. We offer an explanation for that: besides there being multiple non-mutually exclusive factors affecting this relationship, previous empirical work has overlooked how total information or average per investor information, about the stock, changes as belief diversity changes. We show analytically that unless these are held constant or accounted for, comparative statics relating stock price and investor belief diversity will be ambiguous. This suggests augmenting empirical controls.
Murugappa Krishnan
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This page is a summary of: Stock price impact of diversity in investor beliefs, Applied Economics Letters, March 2019, Taylor & Francis,
DOI: 10.1080/13504851.2019.1584361.
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