Differences of Opinion and the Cross Section of Stock Returns

Authors: Diether, Karl B.¹; Malloy, Christopher J.¹; Scherbina, Anna²

Source: The Journal of Finance, Volume 57, Number 5, October 2002 , pp. 2113-2141(29)

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Abstract:

We provide evidence that stocks with higher dispersion in analysts' earnings forecasts earn lower future returns than otherwise similar stocks. This effect is most pronounced in small stocks and stocks that have performed poorly over the past year. Interpreting dispersion in analysts' forecasts as a proxy for differences in opinion about a stock, we show that this evidence is consistent with the hypothesis that prices will reflect the optimistic view whenever investors with the lowest valuations do not trade. By contrast, our evidence is inconsistent with a view that dispersion in analysts' forecasts proxies for risk.

Document Type: Original article

DOI: http://dx.doi.org/10.1111/0022-1082.00490

Affiliations: 1: Graduate School of Business, University of Chicago, 2: Harvard Business School

Publication date: 2002-10-01