This paper shows that the anomalous negative relation between dispersion in analysts’earnings forecast and future stock returnsis driven by the information content of dispersion about future firm profitability. Greater dispersion predicts lower future profitability,and the return predictive power of dispersion disappears after controlling for its information content on future profitability. We propose disclosure manipulationas a potential explanation for the relation between dispersion and future profitability. Consistent with our conjecture,disclosure quality is inversely related to analysts’earnings forecast dispersion. Moreover,the return predictive power of dispersion decreases monotonically in disclosure quality and is no longer statistically significant in the post-Sarbanes-Oxley period during which disclosure manipulation is attenuated.Finally, our results remain robust to considering the previously suggested explanations for the dispersion anomaly, including shortsale constraints, leverage, and credit risk. 

JEL classification : G12; G14
Keywords : Dispersion anomaly; Profitability; Disclosure quality​