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Disagreement, Underreaction, and Stock Returns

Author

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  • Ling Cen

    (Department of Management, University of Toronto Scarborough, Ontario M1C 1A4, Canada; and Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada)

  • K. C. John Wei

    (School of Accounting and Finance, Faculty of Business, Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong)

  • Liyan Yang

    (Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada; and Guanghua School of Management, Peking University, Beijing 100871, China)

Abstract

We explore analysts’ earnings forecast data to improve on one popular disagreement measure—the analyst forecast dispersion measure—proposed by Diether et al. [Diether KB, Malloy CJ, Scherbina A (2002) Differences of opinion and the cross section of stock returns. J. Finance 57:2113–2141]. Our analysis suggests that changes in the standard deviations of forecasted earnings can work as a complementary disagreement measure that is comparable across stocks and immune from other return-predictive information contained in the normalization scalars of analyst forecast dispersion measures. We also document evidence that the change-based disagreement measure predicts future cross-sectional returns significantly only when changes in the mean forecasts are negative. This finding suggests that the interaction between disagreement and underreaction to earnings news affects asset prices.

Suggested Citation

  • Ling Cen & K. C. John Wei & Liyan Yang, 2017. "Disagreement, Underreaction, and Stock Returns," Management Science, INFORMS, vol. 63(4), pages 1214-1231, April.
    • Handle: RePEc:inm:ormnsc:v:63:y:2017:i:4:p:1214-1231
    DOI: 10.1287/mnsc.2015.2405
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    References listed on IDEAS

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