How Analysts’ Disagreement Affect Return Of Stocks

When traditional asset pricing model cannot make a reasonable explanation for some financial anomalies, many scholars tend to doubt the assumption of traditional asset pricing model. The assumption is that all investors are reasonable and have the same expectations of the return of risky assets. Miller was the first scholar who raised a theory on the disagreements and short sale restraint to illustrate their relationship with the return of stocks in 1977. The theory reveals that under short sale restraint, pessimistic investors have no way to trade and optimistic investors are willing to pay high price to buy stocks, which will make the stocks overvalued. The disagreement will be narrowing and the price of the overvalued stocks will be correct with the update and spread of the information, which means future return will decrease.In this paper, the effect of analysts’earning forecast and the cause of analysts’ forecast bias are recommended first. Then, the main source of disagreement for investors and the asset pricing model of disagreement are introduced. After comparing the usual proxy for disagreement and thinking of the importance of analysts in securities market, the dispersion of analysts’earning forecast is used as the proxy of disagreement. Then author tests the way in which analysts’disagreement exert influence on the return of stock that consisted CSI 300 index through asset portfolio analysis and regression tests. The results show that analysts’disagreement has negative relationship with the return of stock. Considering that short-sale mechanism was first introduced in China in March 2010, comparing the impacts of analysts’disagreement to the return of stocks before and after the short-sale introduced day is also illustrated. Short-sale can reduce the volatility of stock’s return is proved by the evidence of the empirical test.Based on the results of empirical tests, the police suggestions towards the regulatory authorities and the investment suggestions to the investors are put forward respectively. The limitation and the further research direction are also mentioned in the end.