Disagreement, Underreaction, and Stock Returns

Ling Cen (), K. C. John Wei () and Liyan Yang
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Ling Cen: Department of Management, University of Toronto Scarborough, Ontario M1C 1A4, Canada; and Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada
K. C. John Wei: School of Accounting and Finance, Faculty of Business, Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong

Management Science, 2017, vol. 63, issue 4, 1214-1231

Abstract: We explore analysts’ earnings forecast data to improve on one popular disagreement measure—the analyst forecast dispersion measure—proposed by Diether et al. [Diether KB, Malloy CJ, Scherbina A (2002) Differences of opinion and the cross section of stock returns. J. Finance 57:2113–2141]. Our analysis suggests that changes in the standard deviations of forecasted earnings can work as a complementary disagreement measure that is comparable across stocks and immune from other return-predictive information contained in the normalization scalars of analyst forecast dispersion measures. We also document evidence that the change-based disagreement measure predicts future cross-sectional returns significantly only when changes in the mean forecasts are negative. This finding suggests that the interaction between disagreement and underreaction to earnings news affects asset prices.

Keywords: disagreement; short-sale constraints; underreaction; cross section of stock returns (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (12)

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