Valuation and Long-Term Growth Expectations

Abstract

Long-term growth expectations are central to investment analysis and corporate valuation. Despite a dominant effect on firm value, the academic literature and practitioner conventions provide little guidance on how this long-term growth rate should be determined. This paper takes a step in addressing this gap: we estimate the relation between long-term growth and an extensive selection of firm, industry, and market characteristics. Market prices do not seem to fully capture long-term growth information. Cross-sectional tests yield substantial positive abnormal returns for firms with high expected long-term growth.

Keywords: Valuation, Terminal Value, Long-Term Growth Rates, Machine Learning, Market Efficiency