Dispersion in analysts' earnings forecasts and credit rating

Doron Avramov, Tarun Chordia, Gergana Jostova and Alexander Philipov

Journal of Financial Economics, 2009, vol. 91, issue 1, 83-101

Abstract: This paper shows that the puzzling negative cross-sectional relation between dispersion in analysts' earnings forecasts and future stock returns may be explained by financial distress, as proxied by credit rating downgrades. Focusing on a sample of firms rated by Standard & Poor's (S&P), we show that the profitability of dispersion-based trading strategies concentrates in a small number of the worst-rated firms and is significant only during periods of deteriorating credit conditions. In such periods, the negative dispersion-return relation emerges as low-rated firms experience substantial price drop along with considerable increase in forecast dispersion. Moreover, even for this small universe of worst-rated firms, the dispersion-return relation is non-existent when either the dispersion measure or return is adjusted by credit risk. The results are robust to previously proposed explanations for the dispersion effect such as short-sale constraints and leverage.

Keywords: Credit; rating; Dispersion; Asset; pricing; anomalies; Financial; distress (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (53)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:91:y:2009:i:1:p:83-101

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