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Divergence of Opinion and Equity Returns

Published online by Cambridge University Press:  06 April 2009

John A. Doukas ,
Chansog (Francis) Kim  and
Christos Pantzalis
John A. Doukas
Affiliation:
[email protected], Department of Finance, Graduate School of Business, Old Dominion University, Constant Hall, Suite 2080, Norfolk, VA 23529
Chansog (Francis) Kim
Affiliation:
[email protected], Department of Accountancy, Faculty of Business, City University of Hong Kong, 83 Tat Chee Avenue, Kowloon, Hong Kong and Department of Accounting, College of Business and Public Administration, Old Dominion University, Constant Hall, Suite 2136, Norfolk, VA 23529
Christos Pantzalis
Affiliation:
[email protected], Department of Finance, College of Business Administration, University of South Florida, Tampa, FL 33620.
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Abstract

In this paper, we examine the relation between stock returns and analysts' heterogeneous expectations. We find that stock returns are positively associated with divergence of opinion. Our evidence provides no support for Miller's (1977) overvaluation hypothesis, which predicts lower (higher) future returns for high (low) divergence of opinion stocks in the presence of short-selling constraints. Our findings are based on the use of the diversity measure, which is free from the confounding effects of uncertainty in analysts' forecasts and is therefore a more accurate measure of divergence of opinion than dispersion. Our results refute the view that dispersion in analysts' forecasts reflects divergence of opinion. Our evidence is robust to the use of alternative measures of short-selling constraints, time intervals, optimism in analysts' forecasts, and herding in analysts' behavior.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 3 , September 2006 , pp. 573 - 606
Copyright
Copyright © School of Business Administration, University of Washington 2006

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