Corporate Disclosure, Analyst Forecast Dispersion, and Stock Returns
University of Texas at Dallas - Naveen Jindal School of Management
Mark H. Liu
University of Kentucky - Gatton College of Business and Economics
University of Iowa - Henry B. Tippie College of Business
August 1, 2012
This paper examines whether a corporate disclosure practice is a reason for the forecast dispersion anomaly -- the negative relation between analyst forecast dispersion and future stock returns. Prior studies have shown that firms tend to disclose good news in a timely manner and delay the disclosure of bad news, and that withholding of news leads to greater dispersion in analysts’ forecasts. Accordingly, we predict that firms with higher dispersion in analysts’ earnings forecasts are more likely to experience poor earnings in subsequent quarters, and find evidence consistent with this prediction. After controlling for the relation between forecast dispersion and future earnings, we find that forecast dispersion is no longer negatively related to future stock returns. These results suggest that firms’ tendency to withhold bad news increases forecast dispersion as well as causes the market to temporarily overvalue stocks until the bad news is publicly released.
Number of Pages in PDF File: 44
Keywords: Corporate disclosure, analyst forecast dispersion, mispricingworking papers series
Date posted: June 18, 2004 ; Last revised: June 26, 2013
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