The Influence of Forecast Dispersion on the Incremental Explanatory Power of Earnings, Book Value, and Analyst Forecasts on Market Prices

Abstract

This study investigates the influence of analyst forecast dispersion on Ohlson's (2001) proposed linear information dynamics where consensus analyst forecasts are suggested as a proxy for other information. Our results indicate that Ohlson's proposed valuation model is most descriptive of market pricing when forecast dispersion, and hence information asymmetry, is high. Our results also suggest that when analysts are confronted with high information asymmetry, they tend to focus less on accounting fundamentals and rely more on other nonaccounting information, thus decreasing the correlation between the explanatory power of analyst forecasts and that of earnings and book value.

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