Working Papers

Forecast Dispersion and Information Selection

Abstract: I show that dispersion among equity analysts' forecasts increases following earnings announcements. I provide evidence that this is due to information selection: analysts rely on different subsets of public information revealed in earnings announcements when revising their forecasts in a high-dimensional setting. Using text data from analysts' reports, I show that analysts cite different information when they revise their forecasts following earnings announcements, providing evidence of information selection. Results from elastic net regressions corroborate these findings but further imply the existence of a common benchmark to which analysts can compare their forecasts. The existence of a common benchmark explains the decrease in forecast dispersion in the periods between earnings announcements. To formalize these findings, I develop a simple model of forecast-making processes under a common benchmark to explain the dynamics of forecast dispersion. My results highlight the importance of information selection as a driver of disagreement, especially in high-dimensional environments.

Disagreement, Subjective Uncertainty, and the Stock Market (with Seung Hyeong Lee and Younggeun Yoo)

Abstract: We propose a new method to separately quantify investor disagreement and subjective uncertainty at the firm level using equity analyst forecasts. Our approach exploits heterogeneity in how forecast dispersion responds to the arrival of signals that are widely perceived as informative and interpreted homogeneously across agents. Intuitively, for a given level of disagreement in point forecasts, a larger post-signal compression in dispersion indicates greater ex-ante subjective uncertainty in investors’ beliefs. Using these measures, we document differences in the economic roles of disagreement and uncertainty. Subjective uncertainty rises sharply prior to crises, while disagreement peaks during and immediately after crises. In the cross-section, stocks with higher disagreement earn lower subsequent returns and exhibit higher trading volume. These effects are significantly attenuated when uncertainty is high. In contrast, higher uncertainty is associated with higher expected returns and lower trading volume. Stock return volatility is strongly related to disagreement but only weakly related to uncertainty. Finally, firm characteristics are more closely linked to disagreement than to uncertainty: Smaller firms, firms with lower profitability, and firms with higher R&D intensity exhibit systematically higher levels of disagreement.