Dispersion of analysts' expectations and the cross-section of stock returns

Empirical evidence is presented to show that the dispersion in analysts' forecasts can explain part of the differences in cross-sectional stock returns. Generally, high dispersion stocks show relatively lower future returns than low dispersion stocks, and the difference in performance is statistically significant. Furthermore, the negative relation between stock returns and dispersions continues to hold even after controlling for size, book-to-market ratio and earnings-price ratio. This empirical fact is consistent with the earlier model of Harrison and Kreps, and demonstrates that investors are exploiting their awareness of heterogeneity in expectations in order to pursue resale gains.