Forecast Dispersion and the Cross Section of Expected Returns

Content Provider	Semantic Scholar
Author	Johnson, Timothy F.
Copyright Year	2004
Abstract	Recent work by Diether, Malloy, and Scherbina (2002) has established a negative relationship between stock returns and the dispersion of analysts' earnings forecasts. I offer a simple explanation for this phenomenon based on the interpretation of dispersion as a proxy for unpriced information risk arising when asset values are unobservable. The relationship then follows from a general options-pricing result: For a levered firm, expected returns should always decrease with the level of idiosyncratic asset risk. This story is formalized with a straightforward model. Reasonable parameter values produce large effects, and the theory's main empirical prediction is supported in cross-sectional tests. Copyright 2004 by The American Finance Association.
Starting Page	1957
Ending Page	1978
Page Count	22
File Format	PDF HTM / HTML
DOI	10.1111/j.1540-6261.2004.00688.x
Volume Number	59
Alternate Webpage(s)	http://www.lbs.lon.ac.uk/ifa/Research/Working_Papers/forecast_dispersion_jf.pdf
Alternate Webpage(s)	http://business.illinois.edu/tcj/papers/JF_2004.pdf
Alternate Webpage(s)	http://facultyresearch.london.edu/docs/jf_dispersion.pdf
Alternate Webpage(s)	http://facultyresearch.london.edu/docs/forecastdispersionjf.pdf
Alternate Webpage(s)	https://doi.org/10.1111/j.1540-6261.2004.00688.x
Language	English
Access Restriction	Open
Content Type	Text
Resource Type	Article