Does analyst forecast dispersion represent investors' perceived uncertainty toward earnings?

This paper investigates the association between analyst forecast dispersion and investors’ perceived uncertainty toward earnings. I construct a new measure for investors’ expectation of earnings announcement uncertainty using changes in implied volatility of option contracts prior to earnings announcement. Unlike other proxies of uncertainty, this measure isolates the incremental uncertainty regarding the upcoming earnings announcement and target the same future release of periodical earnings instead of concurrent uncertainty. Using this new proxy, I find a significant negative correlation between analyst forecast dispersion and investors’ uncertainty in regards to upcoming earnings announcement. This finding is consistent with the story that analyst forecast dispersion on average represents information asymmetry among analysts rather than analysts’ uncertainty toward earnings numbers. Further tests show that this negative relationship is more pronounced in the subsample with lower earnings quality where analyst forecast dispersion is more likely to be a proxy of information asymmetry among analysts. This paper helps to further researchers’ understanding of the information contained in analyst forecast dispersion and introduces a new market-based proxy of earnings announcement uncertainty