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Article

Open Access

Dispersion in Analysts’ Forecasts and Stock Prices: An Empirical Test

Author(s)

Giuseppe Sancetta, Antonio Renzi, Beatrice Orlando

Full-Text PDF Download XML 3365 Views

DOI:10.17265/1537-1514/2012.09.002

Affiliation(s)

Giuseppe Sancetta, Professor, Department of Management, Sapienza University of Rome.
Antonio Renzi, Associate Professor, Department of Management, Sapienza University of Rome.
Beatrice Orlando, Research Assistant, Department of Management, Sapienza University of Rome.

ABSTRACT

The aim of the paper is to study the dispersion phenomena among financial analysts’ judgments and how this influences stock prices. To address this issue, the article has undertaken an empirical investigation of the relationship between expected earnings, as in financial analysts’ forecasts, and stock prices. It considers the dispersion in analysts’ forecast as a proxy of the security risk. As a matter of fact, the return volatility is the most accurate measure of risk, then, consistently, it is correct to consider the earnings’ standard deviation relative to analysts’ expectations as a measure of risk. It chose a regression model to test the research hypothesis and to confirm the inverse relationship between stock prices and the dispersion in analysts’ forecasts in terms of expected earnings. The analysis was conducted on a sample of securities listed on the Eurostoxx 50®. The sample covers a period of six years, from 2002 to 2007, because it is supposed that after 2008, the securities price were strongly influenced by extra-economic factors. The result of the empirical test shows an inverse relationship between the price of the security and the dispersion among analysts’ judgment: the broader the dispersion is, the higher the risk is, with a lowering effect on security price. So, this result seems to confirm that the dispersion in predictions could be considered as a proxy of risk. The outcome has some interesting managerial implications as the insight that strategic maneuvers undertaken to reduce the dispersion among analysts’ forecasts have a positive impact on a security’s price and, consequently, on the company market value.

KEYWORDS

analysts’ forecasts dispersion, stock risk, stock price, financial disclosure

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