Persistence in Growth Versus Market Expectations

Australian Journal of Management, Vol. 33, No. 1, June 2008

31 Pages Posted: 22 Jan 2007 Last revised: 19 Mar 2009

See all articles by Jason Hall

Jason Hall

University of Michigan, Stephen M. Ross School of Business

Matthew Tochterman

University of Queensland - Business School

Date Written: June 2008

Abstract

We measure the persistence and predictability of sales and earnings growth for Australian-listed firms from 1989 to 2006. In contrast to results from the United States, there is evidence of persistence in growth. Rather, there is close to a two-thirds chance that a firm reporting growth above the industry median in one year repeats this performance in the following year. However, there is little evidence that valuation ratios - measured as revenue, earnings or book value of equity relative to market capitalisation - are particularly useful in predicting future growth. Instead, they reflect recent historical growth, especially in the case of the book-to-market ratio. Firms with low book-to-market ratios have relatively high growth over the previous five years, but their growth over the subsequent five years is almost indistinguishable from firms with high book-to-market ratios. The results are consistent with the hypothesis that value stocks outperform growth stocks because investors overstate firms' ability to consistently make high-growth investments.

Keywords: Growth, earnings, valuation

JEL Classification: G11, G14, G15, M41, M47

Suggested Citation

Hall, Jason L. and Tochterman, Matthew, Persistence in Growth Versus Market Expectations (June 2008). Australian Journal of Management, Vol. 33, No. 1, June 2008, Available at SSRN: https://ssrn.com/abstract=958652

Jason L. Hall (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street, Ross School of Business
University of Michigan
ANN ARBOR, MI MI 48104
United States
+1 734 926 6989 (Phone)

Matthew Tochterman

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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