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Earnings dispersion and aggregate stock returns

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  • Jorgensen, Bjorn
  • Li, Jing
  • Sadka, Gil

Abstract

This paper studies the relation between aggregate stock returns and contemporaneous and future cross-sectional earnings dispersion. We hypothesize that increases in expected earnings dispersion signal increases in uncertainty and increases in unemployment, thereby causing expected returns to rise, which in turn causes prices to decline. We find a positive relation between aggregate stock returns and contemporaneous earnings dispersion because higher earnings dispersion is associated with higher expected returns. Consequently, we also find a negative relation between aggregate stock returns and future (one-year ahead) earnings dispersion, as investors anticipate higher future earnings dispersion and higher expected returns.

Suggested Citation

  • Jorgensen, Bjorn & Li, Jing & Sadka, Gil, 2012. "Earnings dispersion and aggregate stock returns," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 1-20.
    • Handle: RePEc:eee:jaecon:v:53:y:2012:i:1:p:1-20
    DOI: 10.1016/j.jacceco.2011.06.001
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    4. Esther Eiling & Raymond Kan & Ali Sharifkhani, 2018. "Sectoral Labor Reallocation and Return Predictability," Working Papers 2018-006, Human Capital and Economic Opportunity Working Group.
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    9. Hui Guo & Xiaowen Jiang, 2011. "Accruals and the Conditional Equity Premium," Journal of Accounting Research, Wiley Blackwell, vol. 49(1), pages 187-221, March.
    10. Birru, Justin & Young, Trevor, 2022. "Sentiment and uncertainty," Journal of Financial Economics, Elsevier, vol. 146(3), pages 1148-1169.
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    More about this item

    Keywords

    Accounting valuation; Earnings dispersion; Expected-return variation; Profitability;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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