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Analyst Disagreement, Mispricing, and Liquidity

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  • RONNIE SADKA
  • ANNA SCHERBINA

Abstract

This paper documents a close link between mispricing and liquidity by investigating stocks with high analyst disagreement. Previous research finds that these stocks tend to be overpriced, but that prices correct downwards as uncertainty about earnings is resolved. Our analysis suggests that one reason mispricing has persisted through the years is that analyst disagreement coincides with high trading costs. We also show that in the cross‐section, the less liquid stocks tend to be more severely overpriced. Additionally, increases in aggregate market liquidity accelerate the convergence of prices to fundamentals. As a result, returns of the initially overpriced stocks are negatively correlated with the time series of innovations in aggregate market liquidity.

Suggested Citation

  • Ronnie Sadka & Anna Scherbina, 2007. "Analyst Disagreement, Mispricing, and Liquidity," Journal of Finance, American Finance Association, vol. 62(5), pages 2367-2403, October.
    • Handle: RePEc:bla:jfinan:v:62:y:2007:i:5:p:2367-2403
    DOI: 10.1111/j.1540-6261.2007.01278.x
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