ABSTRACT This paper reinvestigates opinion divergence, short-sale constraints, and earnings announcement returns, employing best practices from prior literature. I find that information asymmetry—a cleaner proxy for opinion divergence—is positively associated with returns, whereas change in asymmetry is negatively associated with returns, consistent with Varian (1985). I find that the widely-documented negative association between dispersion and returns—typically interpreted as consistent with Miller (1977)—is driven by uncertainty, suggesting that dispersion may represent a noisy proxy for opinion divergence. For firms more likely to be short-sale-constrained—3.5 percent of the sample—I find evidence of a robust, general short-sale constraint (SSC) effect, consistent with Miller. Interactions of dispersion and SSC also generate results consistent with Miller, but interactions of information asymmetry and SSC generate mixed results inconsistent with Miller. Results suggest that both Varian and Miller can be true, but that Miller applies to a limited number of firms. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G14.
Matthew Driskill (Thu,) studied this question.