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What explains the dispersion effect? Evidence from institutional ownership

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  • Hwang, Chuan-Yang
  • Wong, Kit Pong
  • Yi, Long

Abstract

This paper conducts a joint test of two plausible explanations (difference-in-opinion vs. analyst self-censoring) for why stocks with higher dispersion in analysts' earnings forecasts earn lower subsequent returns (the dispersion effect). We exploit exogenous variations in institutional ownership generated by the annual index reconstitution to address the endogeneity concern of institutional ownership. We find results strongly suggest that analyst self-censoring rather than the more popular difference-in-opinion story is the more plausible explanation for the dispersion effect, at least in a sample where the endogeneity bias of institutional ownership is minimized.

Suggested Citation

  • Hwang, Chuan-Yang & Wong, Kit Pong & Yi, Long, 2022. "What explains the dispersion effect? Evidence from institutional ownership," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:pacfin:v:71:y:2022:i:c:s0927538x21002055
    DOI: 10.1016/j.pacfin.2021.101698
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