Stock Prices and Differences of Opinion : Empirical Evidence that Prices Reflect Optimism

I provide empirical support for Miller's (1977) hypothesis that a stock price will reflect the optimistic view whenever there is disagreement about its value. Using dispersion in analyst earnings forecasts as a proxy for disagreement, I find that high-dispersion stocks earn lower returns than otherwise similar stocks. This effect is more pronounced for small-cap and growth stocks. The subnormal returns are linked to the resolution of uncertainty. I also document that consensus earnings forecasts are more optimistic the higher the dispersion in underlying estimates - consistent with a view that the more pessimistic analysts chose not to issue forecasts