Dispersion in Analysts' Forecasts and Stock Prices: an Empirical Test

The aim of the paper is to study the dispersion phenomena among financial analyst’ judgments and how they influence stock prices. To address this issue, we have undertaken an empirical investigation of the relationship between the expected earnings in financial analysts’ forecasts, and stock prices. We consider the dispersion in analysts' forecasts as a proxy of the security risk. If, as a matter of fact, the return volatility is the most accurate measure of risk: then, consistently, it is accurate to consider the earnings' standard deviation relative to analysts’ expectations as a measure of risk. However, there are some divisions among scholars over this point. If our model is correct, then we should observe a reduction in stock prices when the judgments’ volatility increases. We used a sample of securities listed on the Eurostoxx 50 and a regression model to test our hypothesis and confirm the inverse relationship between stock prices and the dispersion in analysts' forecasts in terms of expected earnings. Our test is related to the period 2002-2007 because we believe that after 2008 the security prices were strongly influenced by extra-economic factors.