The earnings expectations game and the dispersion anomaly

D Veenman; Patrick Verwijmeren

doi:https://doi.org/10.1287/mnsc.2021.3983

The earnings expectations game and the dispersion anomaly

D Veenman, Patrick Verwijmeren

Research output: Contribution to journal › Article › Academic › peer-review

4 Citations (Scopus)

62 Downloads (Pure)

Abstract

This study examines the role of differences in firms’ propensity to meet earnings expectations in explaining why firms with high analyst forecast dispersion experience relatively low future stock returns. We first demonstrate that the negative relation between dispersion and returns is concentrated around earnings announcements. Next, we show that this relation disappears when we control for ex ante measures of firms’ propensity to meet earnings expectations and that the component of dispersion explained by these measures drives the return predictability of dispersion. We further demonstrate that firms with low analyst dispersion are substantially more likely to achieve positive earnings surprises and provide new evidence consistent with both expectations management and strategic forecast pessimism explaining this result. Overall, we conclude that investor mispricing of firms’ participation in the earnings-expectations game provides a viable explanation for the dispersion anomaly.

Original language	English
Pages (from-to)	3129-3149
Number of pages	21
Journal	Management Science
Volume	68
Issue number	4
DOIs	https://doi.org/10.1287/mnsc.2021.3983
Publication status	Published - 27 May 2021

Bibliographical note

Funding Information:
The authors thank the Associate Editor and referee, as well as Karthik Balakrishnan, Sjoerd van Bekkum, Henk Berkman, Sanjay Bissessur, Howard Chan, Igor Goncharov, Thomas Keusch, Felix Lamp, Christian Laux, Melissa Lin, Mike Mao, Dong Jun Oh, Peter Pope, Bill Rees, Tjomme Rusticus, Sandra Schafhautle, seminar participants at the University of Bristol, IE Business School Madrid, WU University Vienna, Cass Business School, London Business School, and the University of Florida, as well as participants at the Dutch Accounting Research Conference at Maastricht University and the European Financial Management Association annual meeting at Nyenrode for helpful comments. Parts of this paper were previously part of an early version of Veenman and Verwijmeren (2018).

Publisher Copyright:
Copyright: © 2021 INFORMS

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DispersionAnomalyacceptedAccepted author manuscript, 582 KBLicence: Unspecified

http://hdl.handle.net/1765/133115

Cite this

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title = "The earnings expectations game and the dispersion anomaly",

abstract = "This study examines the role of differences in firms{\textquoteright} propensity to meet earnings expectations in explaining why firms with high analyst forecast dispersion experience relatively low future stock returns. We first demonstrate that the negative relation between dispersion and returns is concentrated around earnings announcements. Next, we show that this relation disappears when we control for ex ante measures of firms{\textquoteright} propensity to meet earnings expectations and that the component of dispersion explained by these measures drives the return predictability of dispersion. We further demonstrate that firms with low analyst dispersion are substantially more likely to achieve positive earnings surprises and provide new evidence consistent with both expectations management and strategic forecast pessimism explaining this result. Overall, we conclude that investor mispricing of firms{\textquoteright} participation in the earnings-expectations game provides a viable explanation for the dispersion anomaly.",

author = "D Veenman and Patrick Verwijmeren",

note = "Funding Information: The authors thank the Associate Editor and referee, as well as Karthik Balakrishnan, Sjoerd van Bekkum, Henk Berkman, Sanjay Bissessur, Howard Chan, Igor Goncharov, Thomas Keusch, Felix Lamp, Christian Laux, Melissa Lin, Mike Mao, Dong Jun Oh, Peter Pope, Bill Rees, Tjomme Rusticus, Sandra Schafhautle, seminar participants at the University of Bristol, IE Business School Madrid, WU University Vienna, Cass Business School, London Business School, and the University of Florida, as well as participants at the Dutch Accounting Research Conference at Maastricht University and the European Financial Management Association annual meeting at Nyenrode for helpful comments. Parts of this paper were previously part of an early version of Veenman and Verwijmeren (2018). Publisher Copyright: Copyright: {\textcopyright} 2021 INFORMS",

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AB - This study examines the role of differences in firms’ propensity to meet earnings expectations in explaining why firms with high analyst forecast dispersion experience relatively low future stock returns. We first demonstrate that the negative relation between dispersion and returns is concentrated around earnings announcements. Next, we show that this relation disappears when we control for ex ante measures of firms’ propensity to meet earnings expectations and that the component of dispersion explained by these measures drives the return predictability of dispersion. We further demonstrate that firms with low analyst dispersion are substantially more likely to achieve positive earnings surprises and provide new evidence consistent with both expectations management and strategic forecast pessimism explaining this result. Overall, we conclude that investor mispricing of firms’ participation in the earnings-expectations game provides a viable explanation for the dispersion anomaly.

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The earnings expectations game and the dispersion anomaly

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Bibliographical note

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