What explains the dispersion effect? Evidence from institutional ownership

Chuan-Yang Hwang, Kit Pong Wong and Long Yi

Pacific-Basin Finance Journal, 2022, vol. 71, issue C

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.

Keywords: Dispersion effect; Analyst incentives; Short-sale constraint; Institutional ownership; Endogeneity (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:71:y:2022:i:c:s0927538x21002055

DOI: 10.1016/j.pacfin.2021.101698

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