Lifetime Earnings

Abstract

Using realized earnings over long periods of time, we investigate errors in earnings expectations implied by stock prices of firms. We compute lifetime earnings for 16,386 (3,711) domestic firms that started trading after (existed as of) January 1, 1975 for the years 1975-2019 and compare such earnings to the stock price prevailing at the beginning of every year starting 1975. Of the 16,386 firms examined, only 17% survived till 2019, 42% merged with other firms and the rest were delisted for other reasons. On average, the firms that started trading after 1975 yielded, at best, no fundamental return in terms of earnings incremental to Treasury bill rate plus 5% when we examine the first day stock price and, at worst, about 60% their initial market value. Mergers account for most of success in recovering the first day stock price. Finally, we predict lifetime earnings using extant information and find economically and statistically significant abnormal future stock returns based on such predictions.

Keywords: lifetime, earnings, stock returns, wealth creation, mergers, IPOs

JEL Classification: G11, G23