Difference of opinion among investors versus analysts

Abstract

We construct an investor‐based measure of differences of opinion (DO) to investigate the different implications of DO between retail investors (DOR), institutional investors (DOI), and analysts (DOA) on asset pricing. Using Chinese stock data, we find that three DO measures (DOR, DOI, and DOI) are negatively related to future returns; DOI’s ability to predict returns can be partly explained by DOR and DOA, whereas DOR contains incremental information not available from DOI and DOA. DOR is more strongly associated with the severe overvaluation caused by retail investors’ optimism than DOI or DOA, emphasising the specific role of retail investors in China’s market. We further show that DOI and DOA are the results of the differences in their information sets, whereas DOR are the results of different interpretations of public information.