Disagreement, Speculation and Management Forecasts

Prior research shows that disagreement leads to speculative trading and a speculative premium in stock prices. We examine how managers respond to this speculative premium. Using exogenous variation in speculative trading due to the reconstitution of the Russell 1000/2000 indices, we find that speculative trading reduces the frequency, likelihood, and precision of management forecasts. Consistent with theory, this relationship is significantly stronger when short sale constraints are more binding, and when managers have stronger equity-based incentives. We also find that managers sell equity to benefit from the speculative premium. In summary, our results suggest that managers issue forecasts opportunistically in response to speculative trading: they either keep silent, or issue fewer and more ambiguous forecasts to prolong disagreement among investors and the speculative premium.