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Earnings information, arbitrage constraints, and the forecast dispersion anomaly

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  • Kim, Soonho
  • Na, Haejung

Abstract

This study investigates the effect of managerial discretionary activities on the anomalous negative relation between analyst forecast dispersion and future stock returns. Our results show that higher discretionary earnings and lower nondiscretionary earnings amplify the analyst dispersion anomaly and suggest that investors follow analysts’ overly optimistic forecasts for firms with higher discretionary earnings and overprice them. Moreover, this relation is more prevalent in subsamples with more severe arbitrage constraints. Such results indicate that higher discretionary earnings, as managerial opportunistic behaviors, are associated with overvaluation in high dispersion stocks.

Suggested Citation

  • Kim, Soonho & Na, Haejung, 2020. "Earnings information, arbitrage constraints, and the forecast dispersion anomaly," Finance Research Letters, Elsevier, vol. 35(C).
    • Handle: RePEc:eee:finlet:v:35:y:2020:i:c:s1544612319301898
    DOI: 10.1016/j.frl.2019.101311
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    Cited by:

    1. Gao, Haoyu & Wen, Huiyu & Yu, Shujiaming, 2022. "Weathering information disruption: Typhoon strikes and analysts’ forecast dispersion," Finance Research Letters, Elsevier, vol. 49(C).

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    More about this item

    Keywords

    Analyst forecast dispersion; Discretionary accruals; Discretionary earnings; Nondiscretionary earnings; Overvaluation; Arbitrage constraints;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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