Earnings expectations game and the dispersion anomaly

Stocks with relatively high dispersion in analyst earnings forecasts are associated with significantly lower future returns. We show that the return predictability of dispersion is concentrated only in quarterly earnings announcement months. Within these months, return predictability is concentrated in the short window around earnings announcement dates. Subsequent tests show that bias in analysts’ earnings expectations explains the relation between dispersion and returns and that return predictability is significant even in recent years. Overall, our findings are consistent with an explanation for the return predictability of dispersion based on errors in earnings expectations.