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Analysts' forecast dispersion and stock returns: a panel threshold regression analysis based on conditional limited market participation hypothesis

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  • Li, Leon
  • Chen, Carl R.

Abstract

Prior research has investigated the association between analysts’ forecast dispersion and future stock return but the evidence is not conclusive. We propose a conditional limited market participation hypothesis and reexamine the relation between analysts’ forecast dispersion and stock returns using the panel threshold regression approach, which allows the coefficient on the independent variable to shift when the conditioned variables exceed their respective thresholds. Our empirical results show that the degree of the negative association between analysts’ dispersion and future stock return becomes considerably diminished when the dispersion exceeds a threshold value. Our finding does not support the view of Johnson (2004), [Forecast dispersion and the cross section of expected returns, J. Financ. 59, 1957–1978], that dispersion in analysts’ forecasts serves as a proxy for risk. Although our results are consistent with the limited market participation argument in Diether et al. (2002), [Differences of opinion and the cross section of stock returns, J. Financ. 57, 2113–2141], we modify their arguments as the strength of their results is conditional on the magnitude of dispersion.

Suggested Citation

  • Li, Leon & Chen, Carl R., 2016. "Analysts' forecast dispersion and stock returns: a panel threshold regression analysis based on conditional limited market participation hypothesis," Finance Research Letters, Elsevier, vol. 18(C), pages 100-107.
    • Handle: RePEc:eee:finlet:v:18:y:2016:i:c:p:100-107
    DOI: 10.1016/j.frl.2016.04.006
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    1. Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-645, August.
    2. Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2113-2141, October.
    3. Hansen, Bruce E., 1999. "Threshold effects in non-dynamic panels: Estimation, testing, and inference," Journal of Econometrics, Elsevier, vol. 93(2), pages 345-368, December.
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    9. Chung-Hua Shen, 2005. "Cost efficiency and banking performances in a partial universal banking system: application of the panel smooth threshold model," Applied Economics, Taylor & Francis Journals, vol. 37(9), pages 993-1009.
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    13. repec:bla:jfinan:v:59:y:2004:i:5:p:1957-1978 is not listed on IDEAS
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    15. Boehme, Rodney D. & Danielsen, Bartley R. & Sorescu, Sorin M., 2006. "Short-Sale Constraints, Differences of Opinion, and Overvaluation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(2), pages 455-487, June.
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    Cited by:

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    More about this item

    Keywords

    Analysts’ forecast dispersion; Limited market participation; Panel threshold model;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • G1 - Financial Economics - - General Financial Markets
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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