Journal of Financial Economics Vol. 152 2024
Disagreement about public information quality and informational price efficiency
Abstract
Investors often hold differing opinions on public information quality. This paper shows that such investor disagreement provides a novel explanation for financial market dynamics around earnings announcements. We propose a rational expectations equilibrium model where investors disagree about the precision of a public signal, which separates a pre-news trading period from a post-news trading period. In equilibrium, investor disagreement about public signal precision diminishes informational price efficiency before the news, but enhances it afterward. Consequently, investor disagreement leads to a notable jump in informed trading around the news, a decline in abnormal trading volume before the news and a surge immediately after the news, and underreaction of stock price to announced earnings.
- DOI
- 10.1016/j.jfineco.2023.103762
- Volume
- 152
- Pages
- 103762
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref