What explains the dispersion effect? Evidence from institutional ownership

Chuan Yang Hwang, Kit Pong Wong, Long Yi*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


This paper conducts a joint test of two plausible explanations (difference-in-opinion vs. analyst self-censoring) for why stocks with higher dispersion in analysts' earnings forecasts earn lower subsequent returns (the dispersion effect). We exploit exogenous variations in institutional ownership generated by the annual index reconstitution to address the endogeneity concern of institutional ownership. We find results strongly suggest that analyst self-censoring rather than the more popular difference-in-opinion story is the more plausible explanation for the dispersion effect, at least in a sample where the endogeneity bias of institutional ownership is minimized.

Original languageEnglish
Article number101698
Number of pages19
JournalPacific Basin Finance Journal
Publication statusPublished - Feb 2022

Scopus Subject Areas

  • Finance
  • Economics and Econometrics

User-Defined Keywords

  • Analyst incentives
  • Dispersion effect
  • Endogeneity
  • Institutional ownership
  • Short-sale constraint


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