Dispersion of Forecasts and Stock Returns

49 Pages Posted: 16 Mar 2006

See all articles by Bilal Erturk

Bilal Erturk

Texas A&M University - Department of Finance

Date Written: March 5, 2006

Abstract

Prior research has established that stocks with high dispersion of earnings forecasts yield lower subsequent returns. I offer a new explanation based on some analysts' reluctance to revise their forecasts downward. I show that analysts' sluggish and non-synchronous response to negative information results in dispersion of forecasts. The inertia in downward forecast revisions also leads to market underreaction to bad news. Therefore, the negative relationship between dispersion and subsequent returns may be partially attributable to some analysts' sluggish response to negative information. I also test whether dispersion of forecasts exacerbates overpricing (Miller (1977)), but find that when dispersion of forecasts increases, prices decrease.

Keywords: dispersion of forecasts, short sale constraints, stock returns

Suggested Citation

Erturk, Bilal, Dispersion of Forecasts and Stock Returns (March 5, 2006). AFA 2007 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=891583 or http://dx.doi.org/10.2139/ssrn.891583

Bilal Erturk (Contact Author)

Texas A&M University - Department of Finance ( email )

360 Wehner
College Station, TX 77843-4218
United States

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