Disagreement, Underreaction, and Stock Returns: A Decomposition Perspective of the Return Predictability of Analyst Forecast Dispersion

2012 ◽  
Author(s):  
Ling Cen ◽  
K. C. John Wei ◽  
Liyan Yang
Keyword(s):  
Stock Returns ◽  
Return Predictability ◽  
Analyst Forecast ◽  
Forecast Dispersion ◽  
Analyst Forecast Dispersion

scholarly journals The Earnings Expectations Game and the Dispersion Anomaly

2021 ◽  
Author(s):  
David Veenman ◽  
Patrick Verwijmeren
Keyword(s):  
Stock Returns ◽  
Return Predictability ◽  
Analyst Forecast ◽  
Forecast Dispersion ◽  
Earnings Expectations ◽  
Negative Relation ◽  
Earnings Surprises ◽  
Ex Ante ◽  
New Evidence

This study examines the role of differences in firms’ propensity to meet earnings expectations in explaining why firms with high analyst forecast dispersion experience relatively low future stock returns. We first demonstrate that the negative relation between dispersion and returns is concentrated around earnings announcements. Next, we show that this relation disappears when we control for ex ante measures of firms’ propensity to meet earnings expectations and that the component of dispersion explained by these measures drives the return predictability of dispersion. We further demonstrate that firms with low analyst dispersion are substantially more likely to achieve positive earnings surprises and provide new evidence consistent with both expectations management and strategic forecast pessimism explaining this result. Overall, we conclude that investor mispricing of firms’ participation in the earnings-expectations game provides a viable explanation for the dispersion anomaly. Accepted by Brian Bushee, accounting.

Confucius confusion: analyst forecast dispersion and business cycles

2018 ◽  
Vol 10 (2) ◽  
pp. 130-145
Author(s):  
Raymond Cox ◽  
Ajit Dayanandan ◽  
Han Donker ◽  
John R. Nofsinger
Keyword(s):  
Business Cycles ◽  
Business Cycle ◽  
Stock Returns ◽  
Turning Points ◽  
Analyst Forecast ◽  
Economic Data ◽  
Forecast Dispersion ◽  
Content Type ◽  
The Us ◽  
Analyst Forecast Dispersion

PurposeFinancial analysts have been found to be overconfident. The purpose of this paper is to study the ramifications of that overconfidence on the dispersion of earnings estimates as a predictor of the US business cycle.Design/methodology/approachWhether aggregate analyst forecast dispersion contains information about turning points in business cycles, especially downturns, is examined by utilizing the analyst earnings forecast dispersion metric. The primary analysis derives from logit regression and Markov switching models. The analysis controls for sentiment (consumer confidence), output (industrial production), and financial indicators (stock returns and turnover). Analyst data come from Institutional Brokers Estimate System, while the economic data are available at the Federal Reserve Bank of St Louis Economic Data site.FindingsA rise in the dispersion of analyst forecasts is a significant predictor of turning points in the US business cycle. Financial analyst uncertainty of earnings estimate contains crucial information about the risks of US business cycle turning points. The results are consistent with some analysts becoming overconfident during the expansion period and misjudging the precision of their information, thus over or under weighting various sources of information. This causes the disagreement among analysts measured as dispersion.Originality/valueThis is the first study to show that analyst forecast dispersion contributions valuable information to predictions of economic downturns. In addition, that dispersion can be attributed to analyst overconfidence.

Corporate Disclosure, Analyst Forecast Dispersion, and Stock Returns

2016 ◽  
Vol 34 (1) ◽  
pp. 54-73 ◽  
Author(s):  
Ashiq Ali ◽  
Mark Liu ◽  
Danielle Xu ◽  
Tong Yao
Keyword(s):  
Stock Returns ◽  
Earnings Forecasts ◽  
Bad News ◽  
Analyst Forecast ◽  
Corporate Disclosure ◽  
Forecast Dispersion ◽  
Negative Relation ◽  
Future Earnings ◽  
Disclosure Practice ◽  
Analyst Forecast Dispersion

This article examines whether a corporate disclosure practice is one of the reasons for the forecast dispersion anomaly—the negative relation between analyst forecast dispersion and future stock returns. Prior studies have shown that firms tend to 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 the subsequent quarter, 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 significantly negatively related to future stock returns. These results suggest that temporary withholding of bad news by firms increases forecast dispersion among analysts and leads to low subsequent stock returns.

Does analyst forecast dispersion represent investors’ perceived uncertainty toward earnings?

2020 ◽  
Vol 19 (3) ◽  
pp. 289-312
Author(s):  
Jundong (Jeff) Wang
Keyword(s):  
Negative Correlation ◽  
Private Information ◽  
Implied Volatility ◽  
Earnings Announcements ◽  
Analyst Forecast ◽  
Forecast Dispersion ◽  
Earnings Announcement ◽  
Content Type ◽  
Analyst Forecast Dispersion ◽  
Forward Looking

Purpose This paper aims to investigate the association between analyst forecast dispersion and investors’ perceived uncertainty toward earnings. Design/methodology/approach A new measure for investors’ expectations of earnings announcement uncertainty is constructed, using changes in implied volatility of option contracts prior to earnings announcements. Unlike other proxies of uncertainty, this measure isolates the incremental uncertainty regarding the upcoming earnings announcement and is a forward-looking measure. Findings Using this new proxy, this paper finds a significant negative correlation between analyst forecast dispersion and investors’ uncertainty regarding the upcoming earnings announcements. Further tests show that this negative correlation is driven by analysts’ private information acquisition rather than analysts; uncertainty toward upcoming earnings announcements. Additional cross-sectional tests show that this negative relationship is more pronounced in the subsample with lower earnings quality. Social implications This paper helps to further the understanding of the information content of analyst forecast dispersion, particularly the ways in which they gather and produce private information and their incentives for so doing. Originality/value This paper introduces a new market-based and forward-looking proxy of earnings announcement uncertainty that should be useful in future research. This paper also provides original empirical evidence that analysts gather and produce an additional private information to the market when facing noisy signals and that their information reduces investors’ uncertainty toward upcoming earnings announcements.

Asset Securitization, Securitization Recourse, and Information Uncertainty

2011 ◽  
Vol 86 (2) ◽  
pp. 541-568 ◽  
Author(s):  
Mei Cheng ◽  
Dan S. Dhaliwal ◽  
Monica Neamtiu
Keyword(s):  
Analyst Forecast ◽  
Financial Assets ◽  
Asset Securitization ◽  
Information Uncertainty ◽  
Forecast Dispersion ◽  
Holding Companies ◽  
Risk Transfer ◽  
Market Participants ◽  
Asset Backed Securities ◽  
Analyst Forecast Dispersion

ABSTRACT: In this study, we examine some of the consequences of asset securitization. Specifically, using a sample of bank holding companies, we investigate whether the difficulty in assessing the true extent of risk transfer, between securitizing banks and investors in asset-backed securities, affects bank information uncertainty. We find that when market participants have a greater difficulty in estimating risk transfer, banks face greater information uncertainty (i.e., larger bid-ask spreads and analyst forecast dispersion). In addition, we find that this effect is mitigated for banks that operate in a higher quality information environment. We also find that banks that securitize financial assets have higher spreads and analyst forecast dispersion as compared to non-securitizing banks.

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