Dispersion of Forecasts and Stock Returns
Oklahoma State University - Stillwater - Department of Finance
March 5, 2006
AFA 2007 Chicago Meetings Paper
Prior research has established that stocks with high dispersion of earnings forecasts yield lower subsequent returns. I offer a new explanation based on some analysts' reluctance to revise their forecasts downward. I show that analysts' sluggish and non-synchronous response to negative information results in dispersion of forecasts. The inertia in downward forecast revisions also leads to market underreaction to bad news. Therefore, the negative relationship between dispersion and subsequent returns may be partially attributable to some analysts' sluggish response to negative information. I also test whether dispersion of forecasts exacerbates overpricing (Miller (1977)), but find that when dispersion of forecasts increases, prices decrease.
Number of Pages in PDF File: 49
Keywords: dispersion of forecasts, short sale constraints, stock returnsworking papers series
Date posted: March 16, 2006
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