Analyst Coverage and Two Puzzles in the Cross Section of Returns

69 Pages Posted: 18 Mar 2011 Last revised: 4 Feb 2013

Thomas J. George

University of Houston - Department of Finance

Chuan-Yang Hwang

Nanyang Technological University (NTU)

Date Written: January 30, 2013

Abstract

We examine a stylized version of Miller's (1977) hypothesis as the explanation of the puzzling ndings of both Chordia, Subrahmanyam and Anshuman (2001) and Ang, Hodrick, Xing and Zhang (2006). Identifying stocks that are prone to disagreement by using low analyst coverage produces results that are strongly consistent with the model's predictions.

The low returns to high return volatility stocks are corrections of optimistic mispricing that arises because information arrivals generate disagreement among traders. Disagreement also implies a negative relation between returns and shocks to trading volume. The abnormal returns to a trading strategy based on idiosyncratic return volatility are explained by the returns to a strategy based on turnover volatility, suggesting that the same economic forces underlie both relations as the model predicts.

Keywords: Idiosyncratic Volatility, Turnover Volatility, Disagreement, Mispricing

JEL Classification: G12, G14

Suggested Citation

George, Thomas J. and Hwang, Chuan-Yang, Analyst Coverage and Two Puzzles in the Cross Section of Returns (January 30, 2013). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1787152 or http://dx.doi.org/10.2139/ssrn.1787152

Thomas J. George (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

Chuan-Yang Hwang

Nanyang Technological University (NTU) ( email )

Singapore, 639798
Singapore
65-67905003 (Phone)
65-6791-3697 (Fax)

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