IRRATIONAL ANALYSTS EXPECTATIONS AS A CAUSE OF EXCESS VOLATILITY IN STOCK-PRICES

This paper investigates whether excess stock price volatility may be d ue in part to a failure of the market to form rational expectations. U sing data on analysts' expectations of long run earnings growth for in dividual companies, we report a number of interrelated results which l end support to this hypothesis. These results together imply that the cross-section of stock prices will also be excessively dispersed, so t hat stocks with low earnings expectations are underpriced and stocks w ith high earnings expectations are overpriced. As analysts' forecasts errors become apparent, stock prices adjust accordingly and so excess returns accrue.