Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-15T07:12:13.020Z Has data issue: false hasContentIssue false
  • English
  • Français

Information and Diversity of Analyst Opinion

Published online by Cambridge University Press:  06 April 2009

Christopher B. Barry  and
Robert H. Jennings
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines problems in the use of divergence of analyst opinion as a proxy for estimation risk in empirical studies of security returns and asset pricing models. We demonstrate that diversity of opinion can increase even though the amount of private information increases, and we show that diversity of opinion may overstate estimation risk if the capital market aggregates the information held by investors. We produce empirical results consistent with our conclusions. Specifically, we find that divergence of opinion can produce measures of estimation risk that are inconsistent with a received proxy for estimation risk and with observed common stock returns.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 2 , June 1992 , pp. 169 - 183
Copyright
Copyright © School of Business Administration, University of Washington 1992

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Admati, A. “A Noisy Rational Expectations Equilibrium for Multi-Asset Securities Markets.” Econometrica, 53 (05 1985), 629–657.CrossRefGoogle Scholar
Alexander, G. J., and Resnick, B. G.. “More on Estimation Risk and Simple Rules for Optimal Portfolio Selection.” Journal of Finance, 40 (03 1985), 125–134.CrossRefGoogle Scholar
Arbel, A., and Strebel, P.. “The Neglected and Small Firm Effects.” The Financial Review, 17 (11 1982), 201–218.CrossRefGoogle Scholar
Atiase, R. “Predisclosure Informational Asymmetries, Firm Capitalization and Security Price Behavior around Earnings Announcements.” Journal of Accounting Research, 23 (Spring 1985), 21–36.CrossRefGoogle Scholar
Barry, C. B. “Effects of Uncertain and Nonstationary Parameters upon Capital Market Equilibrium Conditions.” Journal of Financial and Quantitative Analysis, 13 (09 1978), 419–434.CrossRefGoogle Scholar
Barry, C. B., and Brown, S. J.. “Differential Information and Security Market Equilibrium.” Journal of Financial and Quantitative Analysis, 20 (12 1985), 407–422.CrossRefGoogle Scholar
Barry, C. B., and Gultekin, M. N.. “Differences of Opinion and Neglect: Additional Effects on Risk and Return.” In Earnings Forecasts and Security Returns, Guerard, J. and Gultekin, M., eds. Greenwich, CT: JAI Press (1992).Google Scholar
Bawa, V. S., and Brown, S. J.. “Capital Market Equilibrium: Does Estimation Risk Really Matter?” In Estimation Risk and Optimal Portfolio Choice, Bawa, V. S. and Klein, R. W., eds. Amsterdam: North Holland (1979).Google Scholar
Blackwell, D., and Dubins, L.. “Merging of Opinions with Increasing Information.” Annals of Mathematical Statistics, 33 (1962), 882–886.CrossRefGoogle Scholar
Brauer, G. A. “Using Jump-Diffusion Return Models to Measure Differential Information by Firm Size.” Journal of Financial and Quantitative Analysis, 21 (12 1986), 447–458.CrossRefGoogle Scholar
Brown, S. J. “The Effect of Estimation Risk on Capital Market Equilibrium.” Journal of Financial and Quantitative Analysis, 14 (06 1979), 215–220.CrossRefGoogle Scholar
Clarkson, P., and Thompson, R.. “Empirical Estimates of Beta when Investors Face Estimation Risk.” Journal of Finance, 45 (06 1990), 431–454.CrossRefGoogle Scholar
Coles, J. L., and Lowenstein, U.. “Equilibrium Pricing and Portfolio Composition in the Presence of Uncertain Parameters.” Journal of Financial Economics, 22 (12 1988), 279–304.CrossRefGoogle Scholar
Diamond, D. W., and Verrecchia, R. E.. “Information Aggregation in a Noisy Rational Expectations Economy.” Journal of Financial Economics, 9 (09 1981), 221–235.CrossRefGoogle Scholar
Dickey, J. M., and Fischer, D.. “Coherent Consensus Precedes Certainty.” Technical Report No. 28, Statistical Science Division, SUNY-Buffalo (1975).Google Scholar
Grossman, S. J. “On the Efficiency of Competitive Stock Markets where Agents have Diverse Information.” Journal of Finance, 31 (05 1976), 573–585.CrossRefGoogle Scholar
Grossman, S. J., and Stiglitz, J. E.. “Information and Competitive Price Systems.” American Economic Review, 66 (05 1976), 246–253.Google Scholar
Grossman, S. J., and Stiglitz, J. E.. “On the Impossibility of Informationally Efficient Markets.” American Economic Review, 70 (06 1980), 393–408.Google Scholar
Handa, P., and Linn, S. C.. “Arbitrage Pricing with Incomplete Information.” Unpubl. manuscript, Univ. of Iowa and New York Univ. (1990).Google Scholar
Jacobs, B. I., and Levy, K. N.. “Disentangling Equity Return Regularities: New Insights and Investment Opportunities.” Financial Analysts Journal, 44 (05–06 1988), 18–43.CrossRefGoogle Scholar
Kihlstrom, R., and Mirman, L.. “Information and Market Equilibrium.” Bell Journal of Economics, 6 (Autumn 1975), 357–376.CrossRefGoogle Scholar
Klein, R. W., and Bawa, V. S.. “The Effect of Limited Information and Estimation Risk on Optimal Portfolio Diversification.” Journal of Financial Economics, 5 (06 1977), 89–111.CrossRefGoogle Scholar
Marston, F. “Expected Returns, Risk and Information Availability: Evidence Using Financial Analysts Forecasts.” Unpubl. Ph.D. diss., Univ. of North Carolina (1987).Google Scholar
Raiffa, H., and Schlaifer, R.. Applied Statistical Decision Theory. Cambridge, MA: The M.I.T. Press (1961).Google Scholar