Dispersion in analysts' earnings forecasts and credit rating

Doron Avramov, Tarun Chordia, Gergana Jostova*, Alexander Philipov

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

90 Scopus citations


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 Standard & Poor's (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 non-existent 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.

Original languageAmerican English
Pages (from-to)83-101
Number of pages19
JournalJournal of Financial Economics
Issue number1
StatePublished - Jan 2009
Externally publishedYes


  • Asset pricing anomalies
  • Credit rating
  • Dispersion
  • Financial distress


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