Article | Journal of Finance | October 2002

Differences of Opinion and the Cross-Section of Stock Returns

by Karl B. Diether, Christopher J. Malloy and Anna Scherbina


We provide evidence that stocks with higher dispersion in analysts' earnings forecasts earn lower future returns than otherwise similar stocks.  This effect is most pronounced in small stocks, and stocks that have performed poorly over the past year. Interpreting dispersion in analysts' forecasts as a proxy for differences in opinion about a stock, we show that this evidence is consistent with the hypothesis that prices will reflect the optimistic view whenever investors with the lowest valuations do not trade. By contrast, our evidence is inconsistent with a view that dispersion in analysts' forecasts proxies for risk.

Keywords: Stocks; Forecasting and Prediction; Price; Valuation; Investment Return;


Diether, Karl B., Christopher J. Malloy, and Anna Scherbina. "Differences of Opinion and the Cross-Section of Stock Returns." Journal of Finance 57, no. 5 (October 2002): 2113–2141.