The Level and Persistence of Growth Rates

47 Pages Posted: 10 May 2001 Last revised: 22 Oct 2010

See all articles by Louis K.C. Chan

Louis K.C. Chan

University of Illinois at Urbana-Champaign - Department of Finance

Jason J. Karceski

LSV Asset Management

Josef Lakonishok

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: May 2001

Abstract

Expected long-term earnings growth rates are crucial inputs to valuation models and for cost of capital estimates. We analyze historical long-term growth rates across a broad cross-section of stocks using several operating performance indicators. We test whether growth persists, and whether it is forecastable. Cases of very high growth have occurred, but are relatively rare. There is scant persistence in growth beyond chance, and limited ability to identify firms with high future long-term growth. IBES forecasts are too optimistic, and have low predictive power for long-term growth. Regressions using a variety of predictors confirm the low predictability in growth. Valuations that assume persistently high growth over prolonged periods rest on shaky foundations.

Suggested Citation

Chan, Louis K.C. and Karceski, Jason J. and Lakonishok, Josef, The Level and Persistence of Growth Rates (May 2001). NBER Working Paper No. w8282. Available at SSRN: https://ssrn.com/abstract=269532

Louis K.C. Chan (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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Jason J. Karceski

LSV Asset Management ( email )

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Josef Lakonishok

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-333-7185 (Phone)
217-244-3102 (Fax)

National Bureau of Economic Research (NBER)

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