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An investment-based explanation for the dispersion anomaly

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  • Min, Byoung-Kyu
  • Roh, Tai-Yong

Abstract

We provide an investment-based explanation for the dispersion anomaly. The firms’ optimality condition predicts that expected stock returns equal investment returns (the ratio of expected marginal benefits of investment to marginal costs of investment). We show that the investment model does a good job in explaining the dispersion portfolios. Firms with high forecast dispersion have low expected profitability, which is a key component of expected marginal benefit of investment. Consequently, high forecast dispersion portfolio earns lower expected returns. Our results suggest that the dispersion anomaly could be consistent with the firms’ value maximization.

Suggested Citation

  • Min, Byoung-Kyu & Roh, Tai-Yong, 2020. "An investment-based explanation for the dispersion anomaly," Economics Letters, Elsevier, vol. 186(C).
    • Handle: RePEc:eee:ecolet:v:186:y:2020:i:c:s0165176519304215
    DOI: 10.1016/j.econlet.2019.108832
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    References listed on IDEAS

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    More about this item

    Keywords

    Dispersion anomaly; Investment-based asset pricing; Structural estimation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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