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Stock Return Predictability and the Dispersion in Earnings Forecasts

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  • Cheolbeom Park

    (National University of Singapore)

Abstract

Using monthly data for earnings forecasts by market analysts, this paper shows that the dispersion in forecasts has particularly strong predictive power for future aggregate stock returns at intermediate horizons. The results are robust (1) regardless of whether Newey-West or Hodrick corrected t-statistics are used, (2) when other forecasting or macroeconomic variables are included, (3) when different scaling variables are used for the dispersion measure, and (4) after correcting for finite sample biases. Furthermore, additional results suggest that the dispersion in analysts' forecasts can be interpreted as a measure of the differences in investors' expectations rather than the risk.

Suggested Citation

  • Cheolbeom Park, 2005. "Stock Return Predictability and the Dispersion in Earnings Forecasts," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2351-2376, November.
    • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:6:p:2351-2376
    DOI: 10.1086/497047
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    Cited by:

    1. Chen, Cathy Yi-Hsuan & Fengler, Matthias R. & Härdle, Wolfgang Karl & Liu, Yanchu, 2022. "Media-expressed tone, option characteristics, and stock return predictability," Journal of Economic Dynamics and Control, Elsevier, vol. 134(C).
    2. Yi-Hsuan Chen, Cathy & Fengler, Matthias & Härdle, Wolfgang Karl & Liu, Yanchu, 2018. "Textual Sentiment, Option Characteristics, and Stock Return Predictability," Economics Working Paper Series 1808, University of St. Gallen, School of Economics and Political Science.
    3. Hirota, Shinichi, 2023. "Money supply, opinion dispersion, and stock prices," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 1286-1310.
    4. Boubakri, Narjess & Bouslimi, Lobna & Zhong, Rui, 2022. "Political uncertainty and analysts’ forecasts: International evidence," Journal of Financial Stability, Elsevier, vol. 59(C).
    5. Junjun Ma & Xindan Li & Lei Lu & Weixing Wu & Xiong Xiong, 2022. "Individual investors' dispersion in beliefs and stock returns," Financial Management, Financial Management Association International, vol. 51(3), pages 929-953, September.
    6. Yu, Jialin, 2011. "Disagreement and return predictability of stock portfolios," Journal of Financial Economics, Elsevier, vol. 99(1), pages 162-183, January.
    7. Carlin, Bruce I. & Longstaff, Francis A. & Matoba, Kyle, 2014. "Disagreement and asset prices," Journal of Financial Economics, Elsevier, vol. 114(2), pages 226-238.
    8. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, vol. 24(1), pages 34-75.
    9. Jeffrey Hobbs & Hei Wai Lee & Vivek Singh, 2017. "New evidence on the effect of belief heterogeneity on stock returns," Review of Quantitative Finance and Accounting, Springer, vol. 48(2), pages 289-309, February.
    10. Lee, Hei Wai & Valero, Magali, 2010. "Cross-listing effect on information environment of foreign firms: ADR type and country characteristics," Journal of Multinational Financial Management, Elsevier, vol. 20(4-5), pages 178-196, December.
    11. Caglayan, Mustafa & Pham, Tho & Talavera, Oleksandr & Xiong, Xiong, 2020. "Asset mispricing in peer-to-peer loan secondary markets," Journal of Corporate Finance, Elsevier, vol. 65(C).
    12. Jiang, Danling, 2013. "The second moment matters! Cross-sectional dispersion of firm valuations and expected returns," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3974-3992.
    13. Hillert, Alexander & Jacobs, Heiko & Müller, Sebastian, 2018. "Journalist disagreement," Journal of Financial Markets, Elsevier, vol. 41(C), pages 57-76.
    14. Jia, Yun & Yang, Chunpeng, 2017. "Disagreement and the risk-return relation," Economic Modelling, Elsevier, vol. 64(C), pages 97-104.
    15. Adem Atmaz & Suleyman Basak, 2018. "Belief Dispersion in the Stock Market," Journal of Finance, American Finance Association, vol. 73(3), pages 1225-1279, June.
    16. Bruce I. Carlin & Francis A. Longstaff & Kyle Matoba, 2012. "Disagreement and Asset Prices," NBER Working Papers 18619, National Bureau of Economic Research, Inc.
    17. Mordecai Kurz & Maurizio Motolese, 2011. "Diverse beliefs and time variability of risk premia," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 47(2), pages 293-335, June.
    18. Zhang, Yuzhao, 2014. "Contrarian flows, consumption and expected stock returns," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 101-111.
    19. Andreou, Panayiotis C. & Kagkadis, Anastasios & Philip, Dennis & Tuneshev, Ruslan, 2018. "Differences in options investors’ expectations and the cross-section of stock returns," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 315-336.
    20. Kim, Jun Sik & Ryu, Doojin & Seo, Sung Won, 2014. "Investor sentiment and return predictability of disagreement," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 166-178.
    21. Jan M. Smolarski & Jose G. Vega, 2013. "Extreme events: a study of small oil and gas firms," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(3), pages 809-836, September.
    22. Chansoo Kim & Daniel S Kim & Kwangwon Ahn & M Y Choi, 2017. "Dynamics of analyst forecasts and emergence of complexity: Role of information disparity," PLOS ONE, Public Library of Science, vol. 12(5), pages 1-18, May.
    23. John S. Howe & Emre Unlu & Xuemin (Sterling) Yan, 2009. "The Predictive Content of Aggregate Analyst Recommendations," Journal of Accounting Research, Wiley Blackwell, vol. 47(3), pages 799-821, June.

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