The stock price effects of changes in dispersion of

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We then begin screening the sample based on availability of data to calculate the variables in Eq. 2. Requiring return data from CRSP reduces the sample by 5,944 observations and requiring market capitalization and book-to-market data from Compustat and long-term growth forecasts from I/B/E/S reduces the sample by an additional 5,559 observations. We delete observations with extreme forecast errors of current earnings or forecast revisions of next quarter’s earnings. Extreme observations are those in the top or bottom percentile in each calendar quarter. These criteria result in a final sample of 62,706 observations. We conduct our main tests also on a sub-sample of cases where the earnings surprise is zero (i.e., where the earnings announcement appears to contain no new information about levels of current and future earnings). Using this sub-sample alleviates the need to control for the effect of the earnings news on the announcement period returns, which facilitates the attribution of any market reaction to changes in dispersion of investor beliefs. From our full sample, we extract all firm-quarter observations with current period forecast errors equal to zero. This eliminates 52,653 observations. To control for information related to future earnings, we require the absolute value of the forecast revision in next quarter’s earnings to be less than 0.1% of price. This eliminates an additional 2,087 observations. The value-relevance of forecast revisions within these narrow parameters is more likely to be linear, allowing OLS to better control for future cash flow effects. The final sample size for our specialized sample is 8,056 observations. Panel B of Table 2 presents the distribution of both our full sample and zero-surprise sample over the 1993–2006 period. No single year represents greater than 10% of the total sample. 4.2 Descriptive statistics Panel A of Table 3 reports statistics for the central tendency and variability of key variables. The mean and median 3-day market-adjusted announcement period returns are positive but small in magnitude. Given that the earnings announcements contain both good and bad news, we have no reason to expect a particular sign for this variable. Although not reported in the tables, the statistics for this variable for our zero-surprise sample are of interest. 20 Not surprisingly, the mean (median) 3-day market-adjusted return of - 0.29% ( - 0.26%) is closer to zero for our zero- surprise sample. This is consistent with our sample selection criteria of identifying firms whose earnings announcements provide, on average, less new information about the level of current and future cash flows. However, the inter-quartile range of announcement period returns is 6.30%, and the standard deviation is 7.02%. The announcement returns for the 10th and 90th percentiles are - 7.65% and 7.00%, respectively. Thus, even for our sample with zero forecast errors and negligible forecast revisions, there is substantial variability in the market reaction suggesting
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