Offsetting Disagreement and Security Prices

Abstract

We propose that the whole is generally valued at less than the sum of its parts. The reason is that, in the presence of short-sale constraints and investor disagreement, shares of a company are held by the most bullish investors. To the extent that being bullish on one company does not imply that the same investor is bullish on all other companies, the level of excitement about a portfolio of companies, naturally, is less than the sum of the level of excitement that the individual companies receive from their most fervent supporters. This lowers the value of the portfolio relative to the sum of the values of the individual components. Utilizing mergers and acquisitions, as well as closed-end funds, exchange-traded funds, and conglomerates as settings where the value of the aggregate portfolio and the values of the underlying components can be separately evaluated, we present evidence supporting our proposition.