Differences of Opinion and the Cross Section of Stock Returns


  • Karl B. Diether,

  • Christopher J. Malloy,

  • Anna Scherbina

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    • Diether and Malloy are at the Graduate School of Business, University of Chicago; Scherbina is at Harvard Business School. This paper combines results from two earlier papers: “Analyst Disagreement and the Cross Section of Stock Returns” by Karl B. Diether and Christopher J. Malloy and “Stock Prices and Differences of Opinion: Empirical Evidence that Prices Reflect Optimism” by Anna Scherbina. The authors thank Nick Barberis, Kent Daniel, Doug Diamond, Eugene Fama, Rick Green (the editor), Kathleen Hagerty, Gilles Hilary, Ravi Jagannathan, Robert Korajczyk, Owen Lamont, Joel Lander, Robert MacDonald, Cade Massey, Lior Menzly, Toby Moskowitz, Jeremy Nalewaik, Lubos Pastor, Chris Polk, Todd Pulvino, David Robinson, Richard Thaler, Beverly Walther, Volker Wieland, Andy Wong, and an anonymous referee. Data on analysts' forecasts was provided by I/B/E/S Inc. under a program to encourage academic research. All remaining errors are our own.


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.