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Disposition effect and analyst forecast dispersion

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  • Daniela Vesselinova Balkanska

    (San Francisco State University)

Abstract

Behavioral finance theories posit that behavioral biases are more pronounced when there is higher information uncertainty about fundamentals. This paper examines the relation between the disposition effect, the tendency to ride losses and realize gains, and dispersion in financial analysts’ earnings forecasts for a sample of large U.S. discount brokerage accounts from January 1991 to December 1996. I find that the disposition effect is exacerbated in stocks with higher analyst forecast dispersion. In particular, the disposition effect is 10% in stocks in the highest forecast dispersion quintile and not significant in the lowest forecast dispersion quintile. The driving factor behind these findings is investors’ higher propensity to realize gains when facing higher information uncertainty. The results are robust to controlling for firm size, analyst coverage, idiosyncratic volatility, turnover, and past market-adjusted returns. The results provide supportive evidence for a behavioral bias explanation of the disposition effect consistent with mean-reversion beliefs for winners and loss actualization avoidance for losers.

Suggested Citation

  • Daniela Vesselinova Balkanska, 2018. "Disposition effect and analyst forecast dispersion," Review of Quantitative Finance and Accounting, Springer, vol. 50(3), pages 837-859, April.
    • Handle: RePEc:kap:rqfnac:v:50:y:2018:i:3:d:10.1007_s11156-017-0648-7
    DOI: 10.1007/s11156-017-0648-7
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    More about this item

    Keywords

    Disposition effect; Analyst forecast dispersion; Individual investors; Behavioral finance;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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