Differences of Opinion and the Cross-Section of Stock Returns

Posted: 11 Dec 2003  

Karl Diether

University of Chicago - Booth School of Business

Christopher J. Malloy

Harvard Business School; National Bureau of Economic Research (NBER)

Anna Scherbina

University of California, Davis - Graduate School of Management

Abstract

We provide evidence that stocks with higher dispersion in analysts' earnings forecasts earn lower future returns than otherwise similar stocks. This effect is most pronounced in small stocks, and stocks that have performed poorly over the past year. Interpreting dispersion in analysts' forecasts as a proxy for differences in opinion about a stock, we show that this evidence is consistent with the hypothesis that prices will reflect the optimistic view whenever investors with the lowest valuations do not trade. By contrast, our evidence is inconsistent with a view that dispersion in analysts' forecasts proxies for risk.

Keywords: analyst forecasts, dispersion, differences of opinion, stock returns

JEL Classification: G12

Suggested Citation

Diether, Karl and Malloy, Christopher J. and Scherbina, Anna, Differences of Opinion and the Cross-Section of Stock Returns. Journal of Finance, Vol. 57, No. 5, October 2002. Available at SSRN: https://ssrn.com/abstract=472362

Karl Diether

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Christopher J. Malloy (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Baker Library 277
Boston, MA 02163
United States
617-495-4383 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Anna D. Scherbina

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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