Post by Sapphire Capital on Aug 5, 2008 22:05:57 GMT 4
Dispersion in Analysts' Earnings Forecasts and Credit Rating
Doron Avramov
University of Maryland - Department of Finance
Tarun Chordia
Emory University - Department of Finance
Gergana Jostova
George Washington University - Department of Finance
Alexander Philipov
George Mason University - Finance Area
Journal of Financial Economics (JFE), Forthcoming
Abstract:
This paper shows that the puzzling negative cross-sectional relation between dispersion in analysts' earnings forecasts and future stock returns may be explained by financial distress, as proxied by credit rating downgrades. Focusing on a sample of firms rated by S&P, we show that the profitability of dispersion-based trading strategies concentrates in a small number of the worst-rated firms and is significant only during periods of deteriorating credit conditions. In such periods, the negative dispersion-return relation emerges as low-rated firms experience substantial price drop along with considerable increase in forecast dispersion. Moreover, even for this small universe of worst-rated firms, the dispersion-return relation is nonexistent when either the dispersion measure or return is adjusted by credit risk. The results are robust to previously proposed explanations for the dispersion effect such as short-sale constraints and leverage.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1097664
Doron Avramov
University of Maryland - Department of Finance
Tarun Chordia
Emory University - Department of Finance
Gergana Jostova
George Washington University - Department of Finance
Alexander Philipov
George Mason University - Finance Area
Journal of Financial Economics (JFE), Forthcoming
Abstract:
This paper shows that the puzzling negative cross-sectional relation between dispersion in analysts' earnings forecasts and future stock returns may be explained by financial distress, as proxied by credit rating downgrades. Focusing on a sample of firms rated by S&P, we show that the profitability of dispersion-based trading strategies concentrates in a small number of the worst-rated firms and is significant only during periods of deteriorating credit conditions. In such periods, the negative dispersion-return relation emerges as low-rated firms experience substantial price drop along with considerable increase in forecast dispersion. Moreover, even for this small universe of worst-rated firms, the dispersion-return relation is nonexistent when either the dispersion measure or return is adjusted by credit risk. The results are robust to previously proposed explanations for the dispersion effect such as short-sale constraints and leverage.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1097664