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

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 D., 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)

Brandeis University ( email )

415 South Street
Waltham, MA 02453
United States

HOME PAGE: http://sites.google.com/a/brandeis.edu/anna-scherbina/

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