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

Posted: 26 May 2003

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

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Abstract

Although leading indicators are becoming increasingly important for equity valuation, disclosures of such indicators suffer from the absence of GAAP related guidance on content and presentation. We explicitly examine (i) whether one leading indicator - order backlog - predicts 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 exploits such overweighting generates significant future abnormal returns. However, such mispricing is not due to analysts' inability to incorporate order backlog into their earnings forecasts.

JEL Classification: G12, G14, G29, M41, M45

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. Available at SSRN: https://ssrn.com/abstract=390483

Shivaram Rajgopal

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 (Contact Author)

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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