Earnings Surprises, Mispricing, and the Dispersion Anomaly
50 Pages Posted: 4 Mar 2020
Date Written: February 6, 2020
Firms with high dispersion in analyst earnings forecasts tend to earn relatively low future stock returns. We examine whether investors' inability to unravel differences in firms' propensity to meet earnings expectations explains this phenomenon. We first demonstrate that the return predictability of forecast dispersion is concentrated only around earnings announcement dates. Next, we find that the return predictability of dispersion is driven by the component of dispersion that is explained by measures of expected analyst forecast pessimism and firms' expectations management incentives. These results are not a reflection of other factors such as differences of opinion, firms' exposure to earnings announcement premia, and short-sale constraints. Overall, we conclude that the forecast dispersion anomaly can be explained by investor mispricing of firms' participation in the earnings surprise game.
Keywords: Earnings announcements, sell-side analysts, forecast bias, expectations management, mispricing, forecast dispersion, earnings surprises
JEL Classification: D80, G12, G14, G24, M41
Suggested Citation: Suggested Citation