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 2011
• Subjects: Analyst forecasts; Return predictability; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/3203; https://ink.library.smu.edu.sg/context/lkcsb_research/article/4202/viewcontent/Disparity_LT_ST_forecasted_earnings_2009_sv.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 long-term analyst forecast errors. 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 along with downward and upward revisions in long-term forecasted earnings growth, respectively. Additional results indicate that investor inattention toward firm-level changes in long-term earnings growth is responsible for these risk-adjusted returns.