Sticky Expectations and the Profitability Anomaly

46 Pages Posted: 2 Jan 2018

See all articles by Jean-Philippe Bouchaud

Jean-Philippe Bouchaud

Capital Fund Management

Philipp Krueger

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Augustin Landier

HEC

David Thesmar

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2017

Abstract

We propose a theory of one of the most economically significant stock market anomalies, i.e. the "profitability" anomaly. In our model, investors forecast future profits using a signal and sticky belief dynamics. In this model, past profits forecast future returns (the profitability anomaly). Using analyst forecast data, we measure expectation stickiness at the firm level and find strong support for three additional predictions of the model: (1) analysts are on average too pessimistic regarding the future profits of high profit firms, (2) the profitability anomaly is stronger for stocks which are followed by stickier analysts, and (3) it is also stronger for stocks with more persistent profits.

Keywords: profitability anomaly, Sticky expectations

Suggested Citation

Bouchaud, Jean-Philippe and Krueger, Philipp and Landier, Augustin and Thesmar, David, Sticky Expectations and the Profitability Anomaly (December 2017). CEPR Discussion Paper No. DP12528. Available at SSRN: https://ssrn.com/abstract=3095578

Jean-Philippe Bouchaud (Contact Author)

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 49 49 59 20 (Phone)

Philipp Krueger

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland

Swiss Finance Institute ( email )

Switzerland

Augustin Landier

HEC ( email )

France
+33630006051 (Phone)

HOME PAGE: http://https://sites.google.com/site/augustinlandier/

David Thesmar

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA) ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States
16172259767 (Phone)

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