Essays in finance

My dissertation studies the asset pricing implications of heterogeneous beliefs and non-earnings stock valuation information. The first chapter presents new evidence that dispersion is priced in the cross-section of stock returns. Contrary to previous research, I show that stock returns increase with dispersion in earnings forecasts. My inference is based on comprehensive empirical investigation of dispersion in long-term earnings growth rate forecasts as well as EPS forecasts for the current fiscal year. Dispersion risk premium is stronger for long-term earnings growth rate forecasts as compared to current fiscal year EPS forecasts. Dispersion risk premium is robust to correlation of dispersion with stock return volatility, and cross-sectional stock return factors proposed by the four factor Fama-French model. Cross-sectional stock return implications of dispersion are most pronounced for large stocks with extensive analyst coverage.;In the second chapter, I study the drift in returns of portfolios formed on the basis of the stock price reaction around earnings announcements. The Earnings Announcement Return (EAR) captures the market reaction to unexpected information contained in the company's earnings release. Besides the actual earnings news, this includes unexpected information about sales, margins, investment, and other less tangible information communicated around the earnings announcement. A strategy that buys and sells companies sorted on EAR produces an average abnormal return of 7.55% per year, 1.3% more than a strategy based on the traditional measure of earnings surprise, SUE. The post earnings announcement drift for EAR strategy is stronger than post earnings announcement drift for SUE. More importantly, unlike SUE, the EAR strategy returns do not show a reversal after 3 quarters. The EAR and SUE strategies appear to be independent of each other. A strategy that exploits both pieces of informations generates abnormal returns of about 12.5% on an annual basis.