Earnings Surprises, Mispricing, and the Dispersion Anomaly

50 Pages Posted: 4 Mar 2020

See all articles by David Veenman

David Veenman

University of Amsterdam - Amsterdam Business School (ABS)

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: February 6, 2020

Abstract

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

Veenman, David and Verwijmeren, Patrick, Earnings Surprises, Mispricing, and the Dispersion Anomaly (February 6, 2020). Available at SSRN: https://ssrn.com/abstract=3533736 or http://dx.doi.org/10.2139/ssrn.3533736

David Veenman (Contact Author)

University of Amsterdam - Amsterdam Business School (ABS) ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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