Corporate Disclosure, Analyst Forecast Dispersion, and Stock Returns
44 Pages Posted: 18 Jun 2004 Last revised: 27 Sep 2016
Date Written: August 1, 2012
This paper examines whether a corporate disclosure practice is a reason for the forecast dispersion anomaly -- the negative relation between analyst forecast dispersion and future stock returns. Prior studies have shown that firms tend to disclose good news in a timely manner and delay the disclosure of bad news, and that withholding of news leads to greater dispersion in analysts’ forecasts. Accordingly, we predict that firms with higher dispersion in analysts’ earnings forecasts are more likely to experience poor earnings in subsequent quarters, and find evidence consistent with this prediction. After controlling for the relation between forecast dispersion and future earnings, we find that forecast dispersion is no longer negatively related to future stock returns. These results suggest that firms’ tendency to withhold bad news increases forecast dispersion as well as causes the market to temporarily overvalue stocks until the bad news is publicly released.
Keywords: Corporate disclosure, analyst forecast dispersion, mispricing
Suggested Citation: Suggested Citation