A Corporate Guidance Perspective

Several studies find that stocks with higher dispersion of analysts ’ earnings forecasts have lower future returns. The phenomenon is popularly interpreted as evidence that stock prices reflect optimism in the presence of differences of opinions and short-sales constraints. This paper shows that there also exists a strong negative relation between forecast dispersion and future operating performance. We provide an alternative model to explain this, where analyst forecast dispersion is endogeneously determined by corproate earnings guidance strategies. Firms with better earnings prospects provide more accurate earnings guidance, which leads to less dispersed analysts forecasts. Further empirical analysis supports this explanation