Earnings Surprises, Expectations Management, and the Dispersion Anomaly

This study examines the role of expectations management in explaining why firms with high dispersion in analyst forecasts experience relatively low future stock returns. We first demonstrate that the negative relation between dispersion and returns is concentrated around earnings announcements and that this relation is stronger for firms more likely engaged in expectations management. Next, we find that firms with low analyst dispersion are significantly more likely to achieve positive earnings surprises, and provide new insights consistent with expectations management explaining this link. Most importantly, we find that the return predictability of dispersion is driven by the variation in dispersion that is explained by ex-ante measures of expectations management. These results are not a reflection of differences of opinion, firms' exposure to earnings announcement premia, and short-sale constraints. Overall, we conclude that the dispersion anomaly can be explained by investor mispricing of firms' participation in the earnings surprise game