The Level and Persistence of Growth Rates
47 Pages Posted: 10 May 2001 Last revised: 22 Oct 2010
Date Written: May 2001
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.
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