Stock Returns and the Dispersion in Earnings Forecasts

This paper derives a negative relationship between the dispersion of forecasts among investors and future stock returns based on Harrison and Kreps (1978). Using monthly data for earnings forecasts by market analysts, this paper presents empirically that the dispersion in forecasts has particularly strong predictive power for future stock returns at intermediate horizons (between 25 months and 44 months). The direction of predictive power from the dispersion for future stock returns is consistent with the derived negative relationship. Further, results suggest that the dispersion in forecasts contains information about future stock returns aside from the information contained in other variables.