Does Disagreement Explain Financial Anomalies?

Abstract

We find that disagreement helps explain well-known ten cross-sectional financial anomalies. Specifically, we first show that the underperformance of short legs of the anomalies is most pronounced among high disagreement stocks. This results in stronger financial anomalies among high disagreement stocks, and stronger disagreement effect among stocks in the short legs. Also, the disagreement-mimicking portfolio (return spread between low and high disagreement stocks) subsumes the profits from the long-short anomaly strategies. Finally, disagreement-induced overpricing significantly contributes to the effect of investor sentiment on financial anomalies (Stambaugh, Yu, and Yuan, 2012). Overall evidence highlights the contribution of disagreement to financial anomalies.