Trust Based Origins of Disagreement in Financial Markets

Abstract

Disagreement affects asset prices and several asset specific sources of disagreement have been identified. Still relatively little is known about the potential exogenous sources. This article presents evidence that one such exogenous source is societal trust. Trust leads to two kinds of behavior - reliance on others and disclosure to others. These two behaviors can impact disagreement in diverse ways. We show that higher trust increases reliance, which leads to lower earnings disagreement. On the contrary, higher trust also increases disclosure which leads to higher target price disagreement. Additionally, trust enhances risk taking which is also positively associated with target price disagreement. In addition, the context in trust also matters. Trust in corporates reduces both forms of disagreement. Trust in the press, however, decreases disagreement in earnings estimates while increasing disagreement in target price. Hence, trust effects disagreement in a highly nuanced manner depending on the form of disagreement and context of trust.