Analyst Disagreement, Mispricing and Liquidity

42 Pages Posted: 7 Jul 2004

See all articles by Ronnie Sadka

Ronnie Sadka

Boston College - Carroll School of Management

Anna Scherbina

Brandeis University


This paper documents a close link between mispricing and liquidity by investigating stocks with high analyst disagreement. Previous research finds that these stocks tend to be overpriced, but that prices correct downwards as uncertainty about earnings is resolved. Our analysis suggests that one reason mispricing has persisted through the years is that analyst disagreement coincides with high trading costs. We also show that in the cross-section, the less liquid stocks tend to be more severely overpriced. Additionally, increases in aggregate market liquidity accelerate the convergence of prices to fundamentals. As a result, returns of the initially overpriced stocks are negatively correlated with the time series of innovations in aggregate market liquidity.

Keywords: Analyst disagreement, mispricing, liquidity, Kyle lambda, limits of arbitrage

JEL Classification: G14, G29, G10

Suggested Citation

Sadka, Ronnie and Scherbina, Anna D., Analyst Disagreement, Mispricing and Liquidity. Journal of Finance, Forthcoming, EFA 2005 Moscow Meetings Paper, Available at SSRN:

Ronnie Sadka (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Anna D. Scherbina

Brandeis University ( email )

415 South Street
Waltham, MA 02453
United States


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