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Stock Prices and Differences of Opinion: Empirical Evidence that Prices Reflect Optimism

Kellogg Graduate School of Management Working Paper

56 Pages Posted: 9 May 2001  

Anna Scherbina

University of California, Davis - Graduate School of Management

Date Written: April 2001

Abstract

I provide empirical support for Miller's (1977) hypothesis that a stock price will reflect the optimistic view whenever there is disagreement about its value. Using dispersion in analyst earnings forecasts as a proxy for disagreement, I find that high-dispersion stocks earn lower returns than otherwise similar stocks. This effect is more pronounced for small-cap and growth stocks. The subnormal returns are linked to the resolution of uncertainty. I also document that consensus earnings forecasts are more optimistic the higher the dispersion in underlying estimates - consistent with a view that the more pessimistic analysts chose not to issue forecasts.

Keywords: Differences of opinion, forecast dispersion, optimism, disagreement about stock value, analyst forecasts, price bias, short-sale costs, disagreement, consensus forecast bias, market efficiency

JEL Classification: D82, G10, G12, G14

Suggested Citation

Scherbina, Anna, Stock Prices and Differences of Opinion: Empirical Evidence that Prices Reflect Optimism (April 2001). Kellogg Graduate School of Management Working Paper. Available at SSRN: https://ssrn.com/abstract=267665 or http://dx.doi.org/10.2139/ssrn.267665

Anna D. Scherbina (Contact Author)

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
(530) 754-8076 (Phone)
(530) 752-2924 (Fax)

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