What explains the dispersion effect? Evidence from institutional ownership

Chuan Yang Hwang; Kit Pong Wong; Long Yi

doi:10.1016/j.pacfin.2021.101698

What explains the dispersion effect? Evidence from institutional ownership

Chuan Yang Hwang, Kit Pong Wong, Long Yi^*

^*Corresponding author for this work

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Abstract

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 language	English
Article number	101698
Number of pages	19
Journal	Pacific Basin Finance Journal
Volume	71
DOIs	https://doi.org/10.1016/j.pacfin.2021.101698
Publication status	Published - 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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10.1016/j.pacfin.2021.101698

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title = "What explains the dispersion effect? Evidence from institutional ownership",

abstract = "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.",

keywords = "Analyst incentives, Dispersion effect, Endogeneity, Institutional ownership, Short-sale constraint",

author = "Hwang, {Chuan Yang} and Wong, {Kit Pong} and Long Yi",

note = "Funding Information: We thank Robert Faff (the editor) and the anonymous referee for the helpful comments and suggestions. We also thank conference participants at the 2016 24th Conference on the Theories and Practices of Securities and Financial Markets, the 2017 China Finance Review International Conference, the 2018 AsianFA conference, and the 2018 EFMA conference for helpful comments. All errors are our own. The research is funded by the General Research Fund (project #12505116) of Hong Kong Research Grants Council. Publisher Copyright: {\textcopyright} 2021 Elsevier B.V.",

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doi = "10.1016/j.pacfin.2021.101698",

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AU - Hwang, Chuan Yang

AU - Wong, Kit Pong

AU - Yi, Long

N1 - Funding Information: We thank Robert Faff (the editor) and the anonymous referee for the helpful comments and suggestions. We also thank conference participants at the 2016 24th Conference on the Theories and Practices of Securities and Financial Markets, the 2017 China Finance Review International Conference, the 2018 AsianFA conference, and the 2018 EFMA conference for helpful comments. All errors are our own. The research is funded by the General Research Fund (project #12505116) of Hong Kong Research Grants Council. Publisher Copyright: © 2021 Elsevier B.V.

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N2 - 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.

AB - 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.

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KW - Institutional ownership

KW - Short-sale constraint

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DO - 10.1016/j.pacfin.2021.101698

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VL - 71

JO - Pacific Basin Finance Journal

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What explains the dispersion effect? Evidence from institutional ownership

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