Earnings Dispersion and Aggregate Stock Returns

37 Pages Posted: 6 Apr 2009

See all articles by Bjorn Jorgensen

Bjorn Jorgensen

London School of Economics & Political Science (LSE) - Department of Accounting and Finance

LI JING

affiliation not provided to SSRN

Gil Sadka

University of Texas at Dallas

Multiple version iconThere are 2 versions of this paper

Date Written: March 18, 2009

Abstract

While aggregate earnings should affect aggregate stock returns, standard portfolio theory predicts that the cross-sectional dispersion in firm-level earnings per se would not affect aggregate stock returns. Nonetheless, this paper documents that cross-sectional earnings dispersion is positively related with contemporaneous stock returns and negatively related with lagged stock returns. A possible interpretation of our findings is that an increase in uncertainty causes expected returns to rise, which in turn causes prices to fall. Since prices anticipate future earnings, the uncertainty is manifested in earnings dispersion in the following year (resulting in a negative relation between earnings dispersion and lagged returns). In addition, because the higher earnings dispersion is associated with higher expected returns, the contemporaneous relation between dispersion and stock return is positive. Our findings are robust to including macroeconomic indicators that prior research show is correlated with stock returns.

Keywords: earnings dispersion, expected return variation, profitability

JEL Classification: E32, G12, G14, M41

Suggested Citation

Jorgensen, Bjorn N and JING, LI and Sadka, Gil, Earnings Dispersion and Aggregate Stock Returns (March 18, 2009). Available at SSRN: https://ssrn.com/abstract=1364871 or http://dx.doi.org/10.2139/ssrn.1364871

Bjorn N Jorgensen (Contact Author)

London School of Economics & Political Science (LSE) - Department of Accounting and Finance ( email )

Department of Accounting Room, OLD 2.17
Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://www.lse.ac.uk/accounting/people/bjorn-jorgensen

LI JING

affiliation not provided to SSRN

Gil Sadka

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

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