Dispersion in analysts' target prices and stock returns

We propose the dispersion in analysts' target prices as a new measure of disagreement among analysts and a proxy of ex ante stock risk. In contrast to the negative return predictability of analysts' earnings forecast dispersion but consistent with the risk hypothesis, we document a significant positive relation between the target price dispersion and future stock returns up to 24 months. The next-month return spread between the highest and lowest deciles sorted on the target price dispersion measures can be over 2%. Our findings cannot be explained by the standard risk factors and stock characteristics including the target price revision. Further supporting the risk hypothesis, the target price dispersion is positively related to future stock risk.