The Earnings Expectations Game and the Dispersion Anomaly

Management Science, Forthcoming

62 Pages Posted: 21 Jan 2021

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: December 2020

Abstract

This study examines the role of differences in firms' propensity to meet earnings expectations in explaining why firms with high analyst forecast dispersion experience relatively low future stock returns. We first demonstrate that the negative relation between dispersion and returns is concentrated around earnings announcements. Next, we show that this relation disappears when we control for ex-ante measures of firms' propensity to meet earnings expectations and that the component of dispersion explained by these measures drives the return predictability of dispersion. We further demonstrate that firms with low analyst dispersion are substantially more likely to achieve positive earnings surprises, and provide new evidence consistent with both expectations management and strategic forecast pessimism explaining this result. Overall, we conclude that investor mispricing of firms' participation in the earnings expectations game provides a viable explanation for the dispersion anomaly.

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, The Earnings Expectations Game and the Dispersion Anomaly (December 2020). Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3754858 or http://dx.doi.org/10.2139/ssrn.3754858

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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