Dispersed Analysts’ Forecasts of Firms’ Operational Uncertainties and Stock Returns

Abstract

A company’s operational uncertainty resulting from economic activity could be measured by its contingent liabilities. When the contingent liabilities are forecasted by the analysts, the dispersed analysts’ forecasts might constitute another source of uncertainty. In this study, the Uncertainty (contingent liabilities) of Uncertainty (dispersed analysts’ forecasts) is measured by the UOU indicator. We find that this indicator not only measures the negative correlation between the firm’s UOU and its stock returns, but also serves as a good risk and pricing indicator for the excessive stock returns. Robust tests based on industry, market conditions, and macroeconomic environments indicate our findings are still valid. We, therefore, believe our empirical findings provide a good reference for the investment decision-making process.