Stock Prices and Differences of Opinion: Empirical Evidence that Prices Reflect Optimism

Abstract:     
I provide empirical support for Miller's (1977) hypothesis that a stock price will reflect the optimistic view whenever there is disagreement about its value. Using dispersion in analyst earnings forecasts as a proxy for disagreement, I find that high-dispersion stocks earn lower returns than otherwise similar stocks. This effect is more pronounced for small-cap and growth stocks. The subnormal returns are linked to the resolution of uncertainty. I also document that consensus earnings forecasts are more optimistic the higher the dispersion in underlying estimates - consistent with a view that the more pessimistic analysts chose not to issue forecasts.

Number of Pages in PDF File: 56

Keywords: Differences of opinion, forecast dispersion, optimism, disagreement about stock value, analyst forecasts, price bias, short-sale costs, disagreement, consensus forecast bias, market efficiency

JEL Classification: D82, G10, G12, G14

working papers series