Research Summary
Research Summary
Analyst Disagreement, Mispricing and Liquidity (with Ronnie Sadka)
Description
We document a close link between mispricing and liquidity by
investigating stocks with high analyst disagreement. Previous
research finds that these stocks tend to be overpriced, but prices
correct down as uncertainty about earnings is resolved. We
conjecture that one reason mispricing has persisted is that
analyst disagreement coincides with high trading costs. We also
show that in the cross-section the less liquid stocks tend to be
more severely overpriced. Additionally, increases in aggregate
market liquidity accelerate convergence of prices to fundamentals.
As a result, returns of the initially overpriced stocks are
negatively correlated with the time series of innovations in
aggregate market liquidity.