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

36 Pages Posted: 19 Mar 2008 Last revised: 17 Mar 2009

Zhi Da

University of Notre Dame - Mendoza College of Business

Mitch Warachka

University of San Diego; Claremont McKenna College - Robert Day School of Economics and Finance

Date Written: January 1, 2009

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.

Keywords: Analyst Forecasts, Limited Attention, Return Predictability

JEL Classification: G12, G14

Suggested Citation

Da, Zhi and Warachka, Mitch, Long-Term Earnings Growth Forecasts, Limited Attention, and Return Predictability (January 1, 2009). AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1107637 or http://dx.doi.org/10.2139/ssrn.1107637

Zhi Da

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Mitch Warachka (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States

University of San Diego ( email )

5998 Alcala Park
University of San Diego
San Diego, CA 92110-2492
United States

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