Disagreement, Underreaction, and Stock Returns

Disagreement, Underreaction, and Stock Returns

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Article ID: iaor20171248
Volume: 63
Issue: 4
Start Page Number: 1214
End Page Number: 1231
Publication Date: Mar 2017
Journal: Management Science
Authors: , ,
Keywords: behaviour, forecasting: applications, investment
Abstract:

We explore analysts’ earnings forecast data to improve on one popular disagreement measure–the analyst forecast dispersion measure–proposed by Diether et al. [Diether KB, Malloy CJ, Scherbina A (2002) Differences of opinion and the cross section of stock returns. J. Finance 57:2113–2141]. Our analysis suggests that changes in the standard deviations of forecasted earnings can work as a complementary disagreement measure that is comparable across stocks and immune from other return‐predictive information contained in the normalization scalars of analyst forecast dispersion measures. We also document evidence that the change‐based disagreement measure predicts future cross‐sectional returns significantly only when changes in the mean forecasts are negative. This finding suggests that the interaction between disagreement and underreaction to earnings news affects asset prices. This paper was accepted by Wei Jiang, finance.

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