The Association between Analysts' Earnings Forecast Dispersion and the Magnitude of Earnings Response Coefficient: “Noise” or “Uncertainty”?

Abstract

The nature of analysts' earnings forecast dispersion and what drives a negative association between the dispersion and the magnitude of the earnings response coefficient have been subjects of active debate among accounting researchers. In an attempt to shed some light on this debate, we test a private information search hypothesis which posits that investors' private information search activity will reduce uncertainty about future firm performance, but that the search is less likely to influence the level of noise in earnings. Our result suggests that the previously documented negative association between the two variables is driven more by earnings noise, rather than by fundamental uncertainty about future firm performance.