Sticky Expectations and the Profitability Anomaly

45 Pages Posted: 7 Mar 2016 Last revised: 3 May 2018

See all articles by Jean-Philippe Bouchaud

Jean-Philippe Bouchaud

Capital Fund Management

Philipp Krueger

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; European Corporate Governance Institute (ECGI); University of Geneva - Geneva School of Economics and Management

Augustin Landier

HEC

David Thesmar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: November 23, 2016

Abstract

We propose a theory of one of the most economically significant stock market anomalies, i.e. the "profitability" anomaly. In our model, investors forecast future profits using a signal and sticky belief dynamics. In this model, past profits forecast future returns (the profitability anomaly). Using analyst forecast data, we measure expectation stickiness at the firm level and find strong support for three additional predictions of the model: (1) analysts are on average too pessimistic regarding the future profits of high profit firms, (2) the profitability anomaly is stronger for stocks which are followed by stickier analysts, and (3) it is also stronger for stocks with more persistent profits.

Keywords: Stock market anomalies, Sticky expectations

JEL Classification: G14; G17

Suggested Citation

Bouchaud, Jean-Philippe and Krueger, Philipp and Landier, Augustin and Thesmar, David, Sticky Expectations and the Profitability Anomaly (November 23, 2016). Journal of Finance, Forthcoming, HEC Paris Research Paper No. FIN-2016-1136, Swiss Finance Institute Research Paper No. 16-60, Available at SSRN: https://ssrn.com/abstract=2742730 or http://dx.doi.org/10.2139/ssrn.2742730

Jean-Philippe Bouchaud

Capital Fund Management ( email )

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Philipp Krueger

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

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Swiss Finance Institute ( email )

Switzerland

European Corporate Governance Institute (ECGI) ( email )

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University of Geneva - Geneva School of Economics and Management ( email )

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Augustin Landier

HEC ( email )

France
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David Thesmar (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

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