Abstract

http://ssrn.com/abstract=562285
 
 

References (68)



 
 

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Analyst Disagreement, Mispricing and Liquidity


Ronnie Sadka


Boston College - Carroll School of Management

Anna Scherbina


University of California, Davis - Graduate School of Management


Journal of Finance, Forthcoming
EFA 2005 Moscow Meetings Paper

Abstract:     
This paper documents a close link between mispricing and liquidity by investigating stocks with high analyst disagreement. Previous research finds that these stocks tend to be overpriced, but that prices correct downwards as uncertainty about earnings is resolved. Our analysis suggests that one reason mispricing has persisted through the years is that analyst disagreement coincides with high trading costs. We also show that in the cross-section, the less liquid stocks tend to be more severely overpriced. Additionally, increases in aggregate market liquidity accelerate the convergence of prices to fundamentals. As a result, returns of the initially overpriced stocks are negatively correlated with the time series of innovations in aggregate market liquidity.

Number of Pages in PDF File: 42

Keywords: Analyst disagreement, mispricing, liquidity, Kyle lambda, limits of arbitrage

JEL Classification: G14, G29, G10

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Date posted: July 7, 2004  

Suggested Citation

Sadka, Ronnie and Scherbina, Anna, Analyst Disagreement, Mispricing and Liquidity. Journal of Finance, Forthcoming; EFA 2005 Moscow Meetings Paper. Available at SSRN: http://ssrn.com/abstract=562285

Contact Information

Ronnie Sadka (Contact Author)
Boston College - Carroll School of Management ( email )
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
Anna D. Scherbina
University of California, Davis - Graduate School of Management ( email )
One Shields Avenue
Davis, CA 95616
United States
(530) 754-8076 (Phone)
(530) 752-2924 (Fax)
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