Abstract

http://ssrn.com/abstract=1361731
 
 

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Analysts' Incentives and the Dispersion Effect


Chuan-Yang Hwang


Nanyang Technological University (NTU)

Yuan Li


Deakin University

August 17, 2008


Abstract:     
In this paper, we explain the negative relationship between analysts' forecast dispersion and future stock return, commonly known as the dispersion effect, as a result of analysts' incentives of not fully downward revising their earnings forecasts when they possess bad news about the firms they cover. Consistent with this conjecture, we find (1) that analysts' incentives simultaneously increase dispersion and induce an upward bias in reported consensus forecasts,(2) that the dispersion effect only exists among firms with bad future earnings, (3) that the dispersion effect disappears once we control for the incentive-induced upward bias in the reported consensus forecast, and (4) that the dispersion effect is stronger among firms with lower information uncertainty. The last two findings offer support unique to our analysts' incentives-based explanation of the dispersion effect.

Number of Pages in PDF File: 36

Keywords: Analysts' incentives, Dispersion effect

JEL Classification: G14

working papers series


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Date posted: March 18, 2009  

Suggested Citation

Hwang, Chuan-Yang and Li, Yuan, Analysts' Incentives and the Dispersion Effect (August 17, 2008). Available at SSRN: http://ssrn.com/abstract=1361731 or http://dx.doi.org/10.2139/ssrn.1361731

Contact Information

Chuan-Yang Hwang
Nanyang Technological University (NTU) ( email )
Singapore, 639798
Singapore
65-67905003 (Phone)
65-6791-3697 (Fax)
Yuan Li (Contact Author)
Deakin University ( email )
School of Humanities and Social Sciences
Geelong, Victoria 3217
Australia
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