Offsetting Disagreement and Security Prices

We propose that investors are generally less excited about portfolios than they are about the individual companies in those portfolios. The reason is that companies liked by some investors are often not liked by other investors. This makes it almost impossible to construct a portfolio that perfectly pleases large groups of investors and contains (only) every investor’s most favorite companies. The maximum level of excitement that a portfolio of companies receives from investors, therefore, is almost always less than the sum of the level of excitement that the individual companies in the portfolio receive from their most fervent supporters. In the presence of binding short-sale constraints, wherein prices are set by the most optimistic investors, this difference in the level of excitement can become priced. Utilizing closed-end funds, exchange-traded funds, mergers and acquisitions, and conglomerates in which the value of the aggregate portfolio and the values of the underlying components can be separately evaluated, we present evidence supporting our proposition.