References (51)



Analysts' Incentives and the Dispersion Effect

Chuan-Yang Hwang

Nanyang Technological University (NTU)

Yuan Li

Deakin University

August 17, 2008

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

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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: https://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
65-67905003 (Phone)
65-6791-3697 (Fax)
Yuan Li (Contact Author)
Deakin University ( email )
75 Pigdons Road
Victoria, Victoria 3216
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