The Disparity between Long-Term and Short-Term Forecasted Earnings Growth

• Main Authors: DA, Zhi, WARACHKA, Mitchell Craig
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2008
• Subjects: Analyst Forecasts; Return Predictability; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/1894; https://ink.library.smu.edu.sg/context/lkcsb_research/article/2893/viewcontent/WarachkaM2008Disparity.pdf
• Institution: Singapore Management University

We find the disparity between long-term and short-term analyst forecasted earnings growth is a robust predictor of future returns and revisions in long-term forecasted earnings growth. After adjusting for industry characteristics, stocks whose long-term earnings growth forecasts are far above or far below their implied short-term forecasts for earnings growth have negative and positive subsequent risk-adjusted returns, respectively. Despite the importance of conditioning on short-term forecasted earnings growth, these returns are not driven by earnings momentum. Instead, consistent with investors having limited attention, predictable revisions in long-term analyst forecasts appear to induce return predictability.