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The More We Know About Fundamentals, the Less We Agree on Price: Evidence from Earnings Announcements

Can an earnings announcement decrease disagreement about fundamentals while simultaneously increasing disagreement about price? Kondor (2012) develops a rational expectations model in which the presence of short-horizon investors can lead to a polarization of higher-order beliefs about price (i.e., beliefs regarding the opinions of other investors), even as a public announcement reduces disagreement about fundamentals. Using analyst forecast dispersion and implied volatility to proxy for differences of opinion about fundamentals and price, respectively, I find a positive association between the presence of speculative traders and both the likelihood and extent of divergence between changes in price and earnings disagreement around earnings announcements characterized by decreasing forecast dispersion. Further, I document that the association is stronger following good news announcements than following bad news announcements consistent with more precise public signals triggering higher-order disagreement. Finally, using abnormal announcement period volume to measure disagreement about price, I continue to document a positive association between speculation and the extent of divergence. Taken together, these findings suggest that higher-order beliefs play an important role in assessing the informativeness of earnings announcements.