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Earnings information, arbitrage constraints, and the forecast dispersion anomaly

Soonho Kim and Haejung Na

Finance Research Letters, 2020, vol. 35, issue C

Abstract: This study investigates the effect of managerial discretionary activities on the anomalous negative relation between analyst forecast dispersion and future stock returns. Our results show that higher discretionary earnings and lower nondiscretionary earnings amplify the analyst dispersion anomaly and suggest that investors follow analysts’ overly optimistic forecasts for firms with higher discretionary earnings and overprice them. Moreover, this relation is more prevalent in subsamples with more severe arbitrage constraints. Such results indicate that higher discretionary earnings, as managerial opportunistic behaviors, are associated with overvaluation in high dispersion stocks.

Keywords: Analyst forecast dispersion; Discretionary accruals; Discretionary earnings; Nondiscretionary earnings; Overvaluation; Arbitrage constraints (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:35:y:2020:i:c:s1544612319301898

DOI: 10.1016/j.frl.2019.101311

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