Term structure of analyst forecast dispersion and future stock returns

Abstract

This study investigates the relationship between patterns of multi-period analyst forecast dispersion (defined as the “dispersion term structure”) and future abnormal stock returns. This study finds that the slope of the dispersion term structure is negatively related to future abnormal stock returns. The result indicates that investors do not fully understand the implications of the dispersion term structure for future stock returns and hence adjust their own positions on a delayed basis. I also observe that the negative relationship is weaker when analysts are more credible and when firms have a higher proportion of dedicated institutional investors.