What drives the dispersion anomaly?

This paper shows that the stock return predictability of analysts’ earnings forecast dispersion is driven by the information content of dispersion about future firm profitability. Greater dispersion predicts lower future profitability, and the return predictability of dispersion disappears after con...

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Bibliographic Details
Published in:Journal of banking & finance 2022-05, Vol.138, p.106405, Article 106405
Main Authors: Min, Byoung-Kyu, Qiu, Buhui, Roh, Tai-Yong
Format: Article
Language:English
Subjects:
Disclosure quality
Dispersion anomaly
Profitability
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Summary:This paper shows that the stock return predictability of analysts’ earnings forecast dispersion is driven by the information content of dispersion about future firm profitability. Greater dispersion predicts lower future profitability, and the return predictability of dispersion disappears after controlling for future profitability. We propose disclosure manipulation as an explanation for the relation between dispersion and future profitability. Disclosure quality is inversely related to forecast dispersion. Moreover, the return predictability of dispersion decreases in disclosure quality. Our results are robust to the consideration of previously suggested explanations for the dispersion anomaly.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2022.106405