Skewness and Dispersion of Opinion and the Cross Section of Stock Returns

Abstract

We show that the degree of dispersion and asymmetry of analysts’ earnings forecasts is related to future stock returns. When skewness is negative, future returns are decreasing in the degree of dispersion of analysts’ earnings forecasts; when skewness is positive, future returns are increasing in the degree of dispersion of analysts earnings forecasts. We develop a model that incorporates dispersion and asymmetry in agents’ beliefs that can account for these empirical facts.