Analyst Dispersion Research Articles

A New Measure for Differences of Opinions: Institutional Trade Dispersion

Using 13F quarterly holdings data of institutional investors, we introduce a novel measure for differences of opinions among investors by analyzing divergence in institutional investors’ trades. We find that increases in institutional trade dispersion predict a significant decline in future abnormal returns. Moreover, we find that this relationship persists after controlling for other proxies of divergence of investor opinions, such as the dispersion in analysts’ earnings forecasts, the change in the number of institutions holding the stock, and the dispersion in institutional investors’ holdings relative to their benchmarks. Consistent with Miller (1977), underperformance of high-dispersion stocks is found to be the strongest among stocks that experienced recent significant price increases, the stocks with the highest mispricing scores, and the stocks that face increases in short-interest positions after the onset of dispersion.

Short-term momentum and reversals, turnover, and a stock’s price-to-52-week-high ratio

We show that short-term reversal behavior declines with a stock’s turnover and the prior month’s price-to-52-week-high ratio (PTH), shifting to momentum for stocks with both a relatively high turnover and PTH. This behavior of consecutive one-month individual stock returns is robust to subperiod analysis, risk adjustments, and alternative methodologies. Our findings suggest opposing channels. First, promoting short-term momentum, our evidence implies a PTH-anchoring underreaction to recent news, consistent with the short-term contrarian price-dampening channel of Atmaz et al. (2024) with higher turnover implying a stronger contrarian-induced underreaction. Second, promoting short-term reversals, our evidence reinforces the importance of the well-known liquidity-provision-compensation channel. Reversals are especially strong for low-PTH, low-turnover stocks, where the lower PTH implies a generally smaller-cap, less-liquid stock and the lower turnover implies a weaker contrarian-induced underreaction. We also find that the return behaviors vary with dispersion in analysts’ earnings forecasts and with market-wide sentiment, in a manner consistent with these channels.

Do Investors Undervalue Female Directors Due to Gender Role Stereotypes? Evidence from the United States

We show that female directors are associated with higher equity undervaluation after controlling for the effects of female managers, firm performance, corporate governance, risk, dispersion in analysts’ earnings forecasts, firm size, stock price informativeness, and earnings quality. This association is less pronounced after increased societal awareness of female directors. Our findings are robust to the use of alternative measures of key variables and various tests of endogeneity. We further find that female directors’ committee membership, committee chair role, board tenure, and board experience are positively associated with equity undervaluation. Additional results show that female directors’ age and ethnicity also impact equity undervaluation, and the undervaluation of female directors mostly occurs for firms operating in male‐dominated industries. Our results collectively suggest that investors’ negative gender role stereotyping of female directors contributes to equity undervaluation of firms with female directors. Negative stereotyping of female directors is less pronounced after investors become more aware of the benefits of female directors. Therefore, our findings provide insights for policy makers and suggests that further increased awareness of the benefits of female directors is essential. Policy makers may also consider taking appropriate actions to further minimize gender stereotyping of female directors.

Privileged information access, analyst consensus building, and stock return volatility: Evidence from the JOBS Act

This study examines whether allowing select analysts private access to management before an IPO affects analyst consensus building and subsequently post-IPO stock return volatility. The 2012 Jumpstart Our Business Startups (JOBS) Act creates many exemptions to reduce the cost of going public for smaller issuers that qualify as an Emerging Growth Company (EGC). One set of provisions allows analysts affiliated with an EGC's underwriters to communicate privately with management and potential investors before the IPO. Using a sample of IPOs during 2001–2022, we find that the dispersion in affiliated analysts' initiation forecasts is significantly higher for EGCs than similar IPOs in the pre-JOBS period. A path analysis reveals that the JOBS Act indirectly contributes to the heightened post-IPO stock return volatility through the mediating role of forecast dispersion among affiliated analysts. Our exploratory analyses suggest that more significant variations in affiliated analysts' social connections and their workload tend to be associated with higher forecast dispersion. Overall, our findings indicate that having privileged access to management could reduce consensus among analysts, which can increase post-IPO stock return volatility in EGCs.

CEO Narcissism and Properties of Analysts’ Forecasts

SYNOPSIS Using a sample of S&P 500 companies, this study constructs a measure of CEO narcissism and examines whether and how it impacts the accuracy and dispersion of analysts’ forecasts. Empirical evidence suggests that firms with narcissistic CEOs have higher accuracy and lower dispersion of such forecasts. In investigating the mechanism through which CEO narcissism impacts these properties, we find that firms with narcissistic CEOs are more likely to issue management earnings guidance, albeit less accurate, which results in significant differences in accuracy and dispersion of analysts’ forecasts. This study concludes that through more management voluntary disclosure, CEO narcissism has a positive impact on the accuracy and a negative impact on the dispersion of financial analysts’ forecasts. Although several studies have explored the effect of CEO narcissism on corporate financial reporting, this is the first study to expand such inquiry into the sector of financial analysts. JEL Classifications: G17; M12; M41.

A tale of idiosyncratic volatility and illiquidity shocks: Their correlation and effects on stock returns

This paper documents that the idiosyncratic volatility shock is not a stand-alone anomaly compared to the illiquidity shock. Our empirical evidence shows that the illiquidity shock Granger-causes idiosyncratic volatility shock and is statistically and economically significant in predicting stock returns. More importantly, it subsumes most of the predictive power of idiosyncratic volatility shock. In addition, we find that it is the illiquidity shock, not idiosyncratic shock, that is significantly affected by earnings surprise and is more consistently related to other information-signaling variables such as changes in analyst dispersion, number of sell-side analyst coverage, and institutional ownership.

Corporate Strategic Radicalization and the Quality of Analysts’ Forecasts: A Moderated Mediation Model

This paper examines the impact of corporate strategic radicalization on the quality of analysts’ forecasts and the moderating effect of the effectiveness of internal control by using the data of A-share listed companies from 2008 to 2018 in Shanghai and Shenzhen. The following research results were obtained: Both the error and dispersion of analysts’ forecasts are significant negative with the corporate strategic radicalization; A higher internal control quality can promote the role of strategic radicalization in improving the quality of analysts’ forecasts; The mechanism analysis shows that corporate performance may be a channel by which strategic radicalization works. Further, internal control quality also moderated the mediating effect of corporate performance in the relationship between strategic radicalization and the quality of analysts’ forecasts. The research results further enrich the existing literature on the impact of corporate strategy on analysts’ forecasts, which is conducive to alleviating the negative impact of analysts’ forecast bias.

Data assets, information uses, and operational efficiency

ABSTRACT This paper studies the impact of data assets on firms’ operational efficiency, aiming to show how data assets work in business operations and highlight their key value. Given the rich content, data assets can increase operational efficiency as it embeds firms with valuable information used to optimize resource deployment in production and improve customer relationship management. Using a sample of A-share listed firms in China from 2003 to 2019, we empirically show a consistent and significantly positive relationship between a text-based measure of data assets and operational efficiency. Moreover, the positive effect of data assets on operational efficiency is more pronounced in state-owned enterprises (SOEs), diversified firms with redundant internal information, and firms in a more complex external information environment (i.e. more volatile earnings of the industry or a larger dispersion of analysts’ forecasts). As further evidenced by higher turnover ratios of inventory and lower turnover ratios of accounts receivables in firms with data assets, we verify that data assets lead to efficient production management and flexible customer relationship management. Overall, these results suggest that data assets are valuable in the efficiency improvement of firms by facilitating information uses.

Valuation Risk in Mutual Fund Portfolio Disclosure

Abstract Valuation risk of a security—uncertainty about its fair value—is a subject of considerable concern in the mutual fund industry. If funds report different values for identical securities, investors cannot easily compare their performance. Yet it is not unusual to see identical illiquid stocks, small-cap stocks, stocks with high analyst dispersion, stocks with less analyst coverage, and newly listed stocks valued differently across mutual funds. An equity fund that has positive price dispersion in its portfolio holdings, that performs poorly, that belongs to a fund family with an inclination for aggressive reporting, that holds more stocks subject to stale prices, that holds more pre-IPO firms, or that experiences net outflows will tend to show positive price dispersion again in the next quarter. This behavior is significant in a volatile market. Aggressive reporting helps funds gain in the mutual fund tournament. (JEL G10, G23)

Option Return Predictability

Abstract We uncover new return predictability in the cross-section of delta-hedged equity options. Expected returns to writing delta-hedged calls are negatively correlated with stock price, profit margin, and firm profitability, but positively correlated with cash holding, cash flow variance, new shares issuance, total external financing, distress risk, and dispersion of analysts’ forecasts. Our option portfolio strategies have annual Sharpe ratio above two and remain profitable after transaction costs. Their profits can be explained by two option factors, while equity risk factors have no explanatory power. We find support for several economic channels at work, yet the option return predictability remains puzzling.

The Earnings Expectations Game and the Dispersion Anomaly

This study examines the role of differences in firms’ propensity to meet earnings expectations in explaining why firms with high analyst forecast dispersion experience relatively low future stock returns. We first demonstrate that the negative relation between dispersion and returns is concentrated around earnings announcements. Next, we show that this relation disappears when we control for ex ante measures of firms’ propensity to meet earnings expectations and that the component of dispersion explained by these measures drives the return predictability of dispersion. We further demonstrate that firms with low analyst dispersion are substantially more likely to achieve positive earnings surprises and provide new evidence consistent with both expectations management and strategic forecast pessimism explaining this result. Overall, we conclude that investor mispricing of firms’ participation in the earnings-expectations game provides a viable explanation for the dispersion anomaly. This paper was accepted by Brian Bushee, accounting.

Sell-side Analysts' Disagreement and Stock Prices

In this paper we test the hypothesis that sell recommendations are costlier than buy recommendations by carrying out cointegration analyses. We find that that analyst recommendations that plainly urge the investor to take action (buy, sell) are consistent with their estimated losses (gains). Importantly, we find that analysts react mildly to higher projected losses, and strongly to higher projected capital gains. Also, we find that higher projected losses are positively related to dispersion in analysts' recommendations. In summary, we find empirical evidence in favor of Womack's (1996) hypothesis that the cost of issuing a sell recommendation is greater than the cost of a buy recommendation.

Pre-IPO Meetings and Analyst Consensus Building

We examine whether the consensus among affiliated analysts covering IPO firms changes after the 2012 Jumpstart Our Business Startups (JOBS) Act. The JOBS Act allows only affiliated analysts to attend pre-IPO meetings with managers of IPO firms that qualify as an Emerging Growth Company (EGC). Much of the information from these meetings is likely to be verbal and non-verbal cues from managers. While verbal and non-verbal cues contain value-relevant information, it is not clear how their high degree of subjectivity affects analyst consensus building. Using a sample of 660 IPOs during 2004-2016, we find that the dispersion of affiliated analysts’ initiation forecasts is significantly higher and is associated with larger post-IPO return volatility for EGCs than for similar IPOs prior to the JOBS Act. These findings do not extend to unaffiliated analysts covering EGCs. Further analysis suggests that variation in social connections may contribute to the higher dispersion among affiliated analysts after the JOBS Act. Our findings indicate that having privileged access to EGC management through pre-IPO meetings allows affiliated analysts to form highly subjective assessments, which may have the unintended consequence of contributing to increased information uncertainty for EGCs.

Can the variance after-effect distort stock returns?

Variance after-effect is a perceptual bias in the dynamic assessment of variance. Experimental evidence shows that perceived variance is decreased after prolonged exposure to high variance and increased after exposure to low variance. We introduce this effect in an otherwise standard financial model where information about variance is incomplete and updated sequentially. We introduce a variance after- effect adjustment factor in a bayesian learning model and derive the associated predictive variance. We show theoretically how this adjustment factor affects both average and volatility of excess returns. We construct a proxy of the adjustment factor using the sequence of dispersion of analysts earnings forecast. We provide empirical evidence using US stock data over the sample 1982 - 2019, that fluctuations in this measure are significantly and positively related to excess volatility as predicted by the model. Further confirming the model's implications, we also show how stock returns are positively impacted by the adjustment factor and construct long short strategies that generate significant positive alpha with respect to the Fama-French 5 factor model.

Financial Reporting Quality and Investors' Divergence of Opinion*

ABSTRACTThe main purpose of this study is to analyze the association of financial reporting quality and investors' divergence of opinion. We focus on UK firms listed on the London Stock Exchange. Divergence of opinion is measured by two proxies based on unexpected trading volume and by dispersion in analysts' forecasts made one and two years ahead. Previous literature shows that the amount of firms' disclosure is negatively associated with the dispersion in analysts' forecasts. The results obtained in our study show that the quality of the disclosure is negatively associated with divergence of opinion, whether it is proxied by measures of unexpected trading volume or dispersion in analysts' forecasts. Financial reporting quality affects divergence of opinion not only in the months that immediately follow the disclosure of the reports but in the whole year that follows.

Dispersion in analysts’ target prices and stock returns

We propose the dispersion in analysts’ target prices as a new measure of disagreement among analysts and a proxy of ex ante stock risk. In contrast to the negative return predictability of analysts’ earnings forecast dispersion but consistent with the risk hypothesis, we document a significant positive relation between the target price dispersion and future stock returns up to 24 months. The next-month return spread between the highest and lowest deciles sorted on the target price dispersion measures can be over 2%. Our findings cannot be explained by the standard risk factors and stock characteristics including the target price revision. Further supporting the risk hypothesis, the target price dispersion is positively related to future stock risk.

The Earnings Expectations Game and the Dispersion Anomaly

This study examines the role of differences in firms' propensity to meet earnings expectations in explaining why firms with high analyst forecast dispersion experience relatively low future stock returns. We first demonstrate that the negative relation between dispersion and returns is concentrated around earnings announcements. Next, we show that this relation disappears when we control for ex-ante measures of firms' propensity to meet earnings expectations and that the component of dispersion explained by these measures drives the return predictability of dispersion. We further demonstrate that firms with low analyst dispersion are substantially more likely to achieve positive earnings surprises, and provide new evidence consistent with both expectations management and strategic forecast pessimism explaining this result. Overall, we conclude that investor mispricing of firms' participation in the earnings expectations game provides a viable explanation for the dispersion anomaly.

Does Investors’ Divergence of Opinion Affect Stock Mispricing?

The main purpose of this study is to address the association between investors’ divergence of opinion (DIVOP) and stock mispricing for UK firms listed in the London Stock Exchange Market. Previous research on this topic has provided mixed results. Some studies provide evidence consistent with the overpricing hypothesis, which indicates that DIVOP leads to overpricing because the market overweighs the most optimistic valuations, since optimistic investors can always buy a stock but pessimistic investors can only sell a stock if they already own it or need rely on short-selling, which has costs. Other studies support the underpricing hypothesis, which proposes that DIVOP works as a price risk factor that generates underpricing. We develop an empirical analysis that do not depend on the interpretation of abnormal future stock returns to assess contemporaneous mispricing. We use five explicit measures of mispricing. Also, to safeguard the development of a comprehensive study, we use three kinds of proxies of DIVOP, based on idiosyncratic volatility, dispersion in analysts’ forecasts and unexpected trading volume. The results show a positive significant association between DIVOP and stock mispricing on a yearly basis. This association is stronger for underpriced stocks, which is consistent with the underpricing hypothesis, and indicates that DIVOP signals risk. An implication of this study is that firms have incentives to provide high-quality and explicit information to limit DIVOP and avoid being underpriced.

Earnings Expectations and the Dispersion Anomaly

We show that investors do not fully unravel sell-side analyst forecast pessimism, as measures of prior consensus and individual analyst forecast pessimism predict both the sign of earnings surprises and the stock returns around earnings announcements. Firms with a high probability of forecast pessimism experience significantly higher announcement returns than those with a low probability. Importantly, our findings are driven by pessimistic short-term forecasts as opposed to optimistic longer-term forecasts. We further find that this mispricing is related to the difficulty for investors of identifying differences in expected forecast pessimism. We demonstrate how our findings provide a new explanation for the puzzling phenomenon that the dispersion in analysts’ earnings forecasts, which is also correlated with the probability of forecast pessimism, is negatively associated with future returns. Overall, we conclude that market prices do not fully reflect the conditional probability that a firm meets or beats earnings expectations as a result of analysts’ pessimistically biased short-term forecasts.

Enter Paper Title]Valuation Risk in Mutual Fund Portfolio Disclosure

Valuation risk of a security—uncertainty about its fair value—is a subject of considerable concern in the mutual fund industry. If funds report different values for identical securities, investors cannot easily compare performance. Yet it is not unusual to see identical illiquid stocks, small-cap stocks, stocks with high analyst dispersion, stocks with less analyst coverage, and newly listed stocks valued differently across mutual funds. An equity fund that has positive price dispersion in its portfolio holdings, that performs poorly, that belongs to a fund family with an inclination for aggressive reporting, that holds more stocks subject to stale prices, that holds more pre-IPO firms, or that experiences net outflows will tend to show positive price dispersion again in the next quarter. This behavior is significant in a volatile market. Aggressive reporting helps funds gain in the mutual fund tournament.