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Corporate Disclosure, Analyst Forecast Dispersion, and Stock Returns

44 Pages Posted: 18 Jun 2004 Last revised: 27 Sep 2016

Ashiq Ali

University of Texas at Dallas - Naveen Jindal School of Management

Mark H. Liu

University of Kentucky - Gatton College of Business and Economics

Danielle Xu

Gonzaga University

Tong Yao

University of Iowa - Henry B. Tippie College of Business

Date Written: August 1, 2012

Abstract

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

Ali, Ashiq and Liu, Mark H. and Xu, Danielle and Yao, Tong, Corporate Disclosure, Analyst Forecast Dispersion, and Stock Returns (August 1, 2012). Available at SSRN: https://ssrn.com/abstract=556704 or http://dx.doi.org/10.2139/ssrn.556704

Ashiq Ali

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 West Campbell Road, SM41
Richardson, TX 75080-3021
United States
972-883-6360 (Phone)
972-883-6811 (Fax)

HOME PAGE: http://www.utdallas.edu/~axa042200/

Mark H. Liu

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
859-257-9842 (Phone)
859-257-9688 (Fax)

Danielle Xu

Gonzaga University ( email )

Spokane, WA 99258
United States

Tong Yao (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

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