Analyst Disagreement- A Recipe for Disaster: The Cross-section of Scandinavian Stock Returns

Abstract

We show that dispersion in analysts’ earnings forecasts is negatively related to future returns on the Scandinavian stock markets. This negative relation is most pronounced for small stocks. Considering dispersion in analysts’ earnings forecasts as a proxy for differences of opinion, the results support the view that differences of opinion in the presence of short sale constraints lead to overvaluation. The results cannot be explained by other known factors and they are robust to various changes in methodology. The results suggest that traders can use dispersion in analysts’ earnings forecasts as a profitable trading rule on the Scandinavian stock markets.