The distribution of investor beliefs, stock ownership, and stock returns

We study the relationship between the distribution of investor beliefs, the breadth of ownership, and expected returns in a model where stocks differ in the intensity of disagreement and in the extent to which beliefs are polarized, as measured by the number of optimists and pessimists relative to moderates. Polarization explains the size-dependent relationship between breadth and expected returns that we find empirically: positive for large stocks and negative for small stocks. We also find empirical support for the underlying mechanism: polarized stocks earn lower expected returns and are held more broadly if small and less broadly if large.