August 26, 2019
We estimate investor disagreement from synthetic long and short stock trades in the equity options market. We show that high disagreement predicts low stock returns after positive earnings surprises and high stock returns after negative earnings surprises. These effects are symmetric for stocks, for which short sale constraints are less likely to be binding. For speculative high beta stocks, the negative effect is asymmetrically stronger. In the cross-section of all stocks and in the subset of 500 largest companies, high disagreement robustly predicts low monthly and weekly stock returns.