Disagreement about public information quality and informational price efficiency

Investors often hold differing opinions on public information quality. This paper shows that such investor disagreement provides a novel explanation for financial market dynamics around earnings announcements. We propose a rational expectations equilibrium model where investors disagree about the precision of a public signal, which separates a pre-news trading period from a post-news trading period. In equilibrium, investor disagreement about public signal precision diminishes informational price efficiency before the news, but enhances it afterward. Consequently, investor disagreement leads to a notable jump in informed trading around the news, a decline in abnormal trading volume before the news and a surge immediately after the news, and underreaction of stock price to announced earnings.