Do Stock Prices Reflect Growth Forecasts?
30 Pages Posted: 5 Nov 2012
Date Written: January 1, 2012
In this paper we propose a new analysis of the association between the growth of the earnings per share (EPS) as reflected in analysts’ forecasts, the book value of equity, the EPS and the market value of equity. Specifically, we motivate and introduce a new specification of the dynamics of the growth in EPS and test its implications in equity valuation. Our empirical results support the predictions of the valuation model and appear consistent with the time varying level of association between the stock prices, the EPS and the growth in EPS.
Keywords: EPS, stock valuation, Book value of equity, Growth, Earnings forecasts
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