Long-Term Earnings Growth Forecasts, Limited Attention, and Return Predictability
36 Pages Posted: 19 Mar 2008 Last revised: 17 Mar 2009
Date Written: January 1, 2009
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: Suggested Citation