Forecast dispersion and the cross section of expected returns

Deskripsi

Recent work by Diether, Malloy, and Scherbina (2002) has established a negative relationship between stock returns and the dispersion of analysts' earning forecasts. I offer a simple explanation for this phenomenon based on the interpretation of dispersion as a proxy for unpriced information risk arising when asset values are unobservable. The relationship then follows from a general options-pricing result : for a levered firm, expected returns should always decrease with the level of idiosyncratic asset risk..Printed Journal