Disagreement, Underreaction, and Stock Returns

Management Science, 2017, 63(4), 1214–1231

51 Pages Posted: 15 Nov 2012 Last revised: 21 Nov 2017

Ling Cen

University of Toronto - Rotman School of Management

K.C. John Wei

Hong Kong Polytechnic University

Liyan Yang

University of Toronto - Rotman School of Management

Date Written: November 3, 2015

Abstract

We explore analysts’ earnings forecast data to improve upon one popular disagreement measure — the analyst forecast dispersion measure — proposed by Diether, Malloy, and Scherbina (2002). Our analysis suggests that changes in the standard deviations of forecasted earnings can work as a complementary disagreement measure that is comparable across stocks and immune from other return-predictive information contained in the normalization scalars of analyst forecast dispersion measures. We also document evidence that the change-based disagreement measure predicts future cross-sectional returns significantly only when changes in the mean forecasts are negative. This finding suggests that the interaction between disagreement and underreaction to earnings news affects asset prices.

Keywords: Disagreement, short-sale constraints, underreaction, cross-section of stock returns

JEL Classification: G02, G12, G14

Suggested Citation

Cen, Ling and Wei, K.C. John and Yang, Liyan, Disagreement, Underreaction, and Stock Returns (November 3, 2015). Management Science, 2017, 63(4), 1214–1231. Available at SSRN: https://ssrn.com/abstract=2174598 or http://dx.doi.org/10.2139/ssrn.2174598

Ling Cen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Liyan Yang (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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