Long-Term Earnings Growth Forecasts, Limited Attention, and Return Predictability
University of Notre Dame - Mendoza College of Business
University of San Diego; Claremont Colleges - Robert Day School of Economics and Finance
January 1, 2009
AFA 2010 Atlanta Meetings Paper
Long-term earnings expectations are critically important to stock price valuations. We identify relative optimism and relative pessimism in long-term analyst forecasts by comparing these forecasts with implied short-term earnings growth forecasts across firms within the same industry. Stocks with relatively optimistic and relatively pessimistic long-term analyst forecasts have negative and positive risk-adjusted returns, respectively. This return predictability depends critically on short-term forecasts since relative optimism and relative pessimism originate from the slow diffusion of information from short-term to long-term analyst forecasts. Our results indicate that market participants have limited attention regarding the long-term earnings implications of information.
Number of Pages in PDF File: 36
Keywords: Analyst Forecasts, Limited Attention, Return Predictability
JEL Classification: G12, G14
Date posted: March 19, 2008 ; Last revised: March 17, 2009
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