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 journalJournal articlepeer-review

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    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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