Long-Term Earnings Growth Forecasts, Limited Attention, and Return Predictability

Abstract:     
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

working papers series