The earnings expectations game and the dispersion anomaly

Research output: Contribution to journalArticleAcademicpeer-review

6 Citations (Scopus)
201 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 languageEnglish
Pages (from-to)3129-3149
Number of pages21
JournalManagement Science
Volume68
Issue number4
DOIs
Publication statusPublished - 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

Fingerprint

Dive into the research topics of 'The earnings expectations game and the dispersion anomaly'. Together they form a unique fingerprint.

Cite this