“Dispersion in Beliefs among Active Mutual Funds and the Cross-Section of Stock Returns” by Hao Jiang
University of California
This paper establishes a strong link between the dispersion in beliefs among mutual fund managers, as revealed through their active holdings, and future stock returns. We find that after standard risk adjustments, stocks in the top decile portfolio with high dispersion outperform their low-dispersion peers in the bottom decile by 8.76% in annualized terms. This effect of dispersion on returns is particularly pronounced among stocks with high information asymmetry; moreover, the lower returns on stocks with low dispersion concentrate on those with binding short-sale constraints. These results are consistent with a subgroup of informed managers driving up the dispersion in active holdings when they place large bets after receiving positive information signals unobserved by their peers; conversely, binding short-sale constraints prevent them from fully using their negative private information, leading to low dispersion in active holdings.