The Relation between Dispersion in Analysts' Forecasts and Stock Returns: Optimism Versus Drift

Posted: 24 Aug 2004

See all articles by Shuping Chen

Shuping Chen

University of Texas at Austin - Red McCombs School of Business

James J. Jiambalvo

University of Washington - Michael G. Foster School of Business

Date Written: July 26, 2004

Abstract

This paper investigates the conclusion in Diether, Malloy, and Scherbina (2002) that dispersion in analysts' forecasts proxies for differences in investor beliefs, and that prices reflect the beliefs of optimistic investors when dispersion is high. If this is the case, we expect to find higher earnings response coefficients (ERCs), related to negative earnings surprises, for high versus low dispersion firms. This follows because the negative earnings surprises are less consistent with the beliefs of optimists. However, we find smaller ERCs, which calls into question the optimism argument in DMS. Further, we find that the relatively low future returns earned by high forecast dispersion firms, documented in DMS, are explained by the well known post-earnings-announcement drift phenomena. Specifically, after sorting observations based on prior period standardized unexpected earnings (SUEs), which are associated with drift, the difference between the future returns of high versus low dispersion firms is not statistically significant.

Keywords: Analysts' forecasts, Dispersion, Optimism, Stock Returns, Post-Earnings-Announcement Drift

JEL Classification: G12, G14, G29, M41

Suggested Citation

Chen, Shuping and Jiambalvo, James J., The Relation between Dispersion in Analysts' Forecasts and Stock Returns: Optimism Versus Drift (July 26, 2004). Available at SSRN: https://ssrn.com/abstract=580901 or http://dx.doi.org/10.2139/ssrn.580901

Shuping Chen (Contact Author)

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States
521.471.5328 (Phone)

James J. Jiambalvo

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States
206-543-9132 (Phone)
206-685-9392 (Fax)

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