We present empirical evidence that the dispersion in analysts' forecasts can explain a part of differences in cross sectional stock returns. Generally, high dispersion stocks show relatively lower returns than low dispersion stocks, and the difference in performance is statistically significant. Furthermore, the negative relation between stock returns and dispersions continues to hold even after controlling for size, book-to-market ratio and earnings-price ratio. This empirical fact is consistent with Harrison and Kreps (1978), which demonstrates that investors are exploiting their awareness of heterogeneity in expectations in order to pursue resale gains.
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Paper provided by National University of Singapore, Department of Economics in its series Departmental Working Papers with number
wp0118.