Does the Stock Market Fully Appreciate the Implications of Leading Indicators for Future Earnings? Evidence from Order Backlog

47 Pages Posted: 19 Dec 2001

See all articles by Shivaram Rajgopal

Shivaram Rajgopal

Columbia Business School

Terry J. Shevlin

University of California-Irvine

Mohan Venkatachalam

Duke University - Fuqua School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 2001

Abstract

A number of recent studies assume market efficiency and hence interpret an association between stock returns and leading indicators as evidence of the contribution of such indicators to future earnings. We explicitly examine (i) whether one leading indicator - order backlog - has predictive ability for future earnings, and (ii) whether market participants correctly incorporate such predictive ability in determining share prices. We find that the stock market overweights the contribution of order backlog in predicting future earnings and a hedge strategy that takes positions on the cross-sectional distribution of backlog generates significant future abnormal returns. Additional analysis indicates that the market mispricing is not due to analysts' inability to incorporate order backlog into their earnings forecasts.

JEL Classification: G12, G14, G29, M41

Suggested Citation

Rajgopal, Shivaram and Shevlin, Terry J. and Venkatachalam, Mohan, Does the Stock Market Fully Appreciate the Implications of Leading Indicators for Future Earnings? Evidence from Order Backlog (December 2001). Available at SSRN: https://ssrn.com/abstract=294434 or http://dx.doi.org/10.2139/ssrn.294434

Shivaram Rajgopal (Contact Author)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Terry J. Shevlin

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

Mohan Venkatachalam

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7859 (Phone)
919-660-7971 (Fax)

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