Why Do Analysts Disagree ?

This paper finds that about one-quarter of analyst forecast dispersion and one-half of the dispersion-return relationship between 1985 and 2012 are explained by analyst overconfidence. In particular, the firm’s analyst overconfidence mean and analyst overconfidence dispersion are the two most significant determinants of analyst forecast dispersion. Together, these two variables capture 77% of the explained variation in analyst forecast dispersion when all known determinants are considered. With respect to the dispersion-return relationship, the analyst forecast dispersion predicted by analyst overconfidence leads to a monthly hedging portfolio profit of 0.35% compared to a profit of 0.37% for the analyst forecast dispersion not predicted by analyst overconfidence.