Dispersion in Analysts' Earnings Forecasts and Credit Rating


Tarun Chordia
Tarun Chordia
  • Speaker
Goizueta Business School, Emory University

Event Information

Type
Research Seminar
Programme
Finance
Date
Tue. 29 Apr. 2008
Contact
Time
15:30-17:00 hours
E-mail
Location
Mandeville Building T3-06
Number


Abstract

This paper shows that the puzzling negative cross-sectional relation between dispersion in analysts' earnings forecasts and future stock returns is a manifestation of financial distress, as proxied by credit rating downgrades. Focusing on a sample of firms rated by S&P, we show that the profitability of dispersion based trading strategies concentrates in a small number of the worst-rated firms and is significant only during periods of deteriorating credit conditions. In such periods, the negative dispersion-return relation emerges as low-rated firms experience substantial price drop along with considerable increase in forecast dispersion. Moreover, even for this small universe of worst-rated firms, the dispersion-return relation is nonexistent when either the dispersion measure or return is adjusted by credit risk. The results are robust to previously proposed explanations for the dispersion effect such as short-sale constraints, illiquidity, and leverage.
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Contact information:
Ingolf Dittmann
Email
Ingolf Dittmann
Professor of Corporate Governance and Managerial Accounting
  • Coordinator