SHORT SALE CONSTRAINTS, INVESTOR SENTIMENT, AND ANALYST FORECAST DISPERSION: IMPLICATIONS FOR STOCK RETURNS

Abstract

This study examines the relationship between analyst forecast dispersion and subsequent stock returns in high and low sentiment periods, with a focus on reconciling previous research on the risk effect and mispricing effect. Using non-financial common stocks on the NYSE, AMEX, and Nasdaq from January 1983 to December 2010, the study shows that overvaluation only occurs for the most dispersed stocks following high sentiment periods. The results also demonstrate that investor sentiment has a substantial impact on stock prices, adding to the growing literature on the topic. By combining difference of opinion, short-sale constraints, and investor sentiment, the study offers a comprehensive framework for understanding the dispersion effect and its implications for stock returns. Overall, the study contributes to the literature by investigating the dispersion effect across different sentiment periods, reconciling the mixed results on risk effect and mispricing effect, and exploring the impact of investor sentiment on overpricing