Investor Beliefs about Mispriced Stocks
Abstract: This paper exploits a unique case of mispricing of a major European airline company to understand investments in overpriced stocks. We run an information provision experiment with 130 retail investors who own stocks in this company. The main result of the paper is that retail investors who are informed about the overpricing are 20 percentage points more likely to sell the stock. We furthermore analyze the broader characteristics of more than 10,000 retail investors who own the overpriced stock. These investors have lower risk-adjusted returns and are more likely to engage in overtrading than other retail investors. A final survey shows that stock owners have more optimistic beliefs about the mispriced stock than other investors. The findings are consistent with models where heterogeneous beliefs may lead to overpricing.