Stock Prices and Differences of Opinion: Empirical Evidence that Prices Reflect Optimism

In this paper, Assistant Professor Anna Scherbina provides empirical support for Miller’s 1977 hypothesis that a stock price will reflect the optimistic view whenever there is disagreement about its value. Using dispersion in analyst earnings forecasts as a proxy for disagreement, she finds that high-dispersion stocks earn lower returns than otherwise similar stocks. This effect is more pronounced for small-cap and growth stocks, and the subnormal returns are linked to the resolution of uncertainty.

Scherbina also documents that consensus earnings forecasts are more optimistic the higher the dispersion in underlying estimates, which is consistent with a view that the more pessimistic analysts choose not to issue forecasts.