The Level and Persistence of Growth Rates

Posted: 12 Oct 2003

See all articles by Louis K.C. Chan

Louis K.C. Chan

University of Illinois at Urbana-Champaign - Department of Finance

Jason J. Karceski

LSV Asset Management

Josef Lakonishok

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

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Abstract

Expectations about long-term earnings growth are crucial to valuation models and cost of capital estimates. We analyze historical long-term growth rates across a broad cross section of stocks using several indicators of operating performance. We test for persistence and predictability in growth. While some firms have grown at high rates historically, they are relatively rare instances. There is no persistence in long-term earnings growth beyond chance, and there is low predictability even with a wide variety of predictor variables. Specifically, IBES growth forecasts are overly optimistic and add little predictive power. Valuation ratios also have limited ability to predict future growth.

Suggested Citation

Chan, Louis K.C. and Karceski, Jason J. and Lakonishok, Josef, The Level and Persistence of Growth Rates. Journal of Finance, Vol. 58, pp. 643-684, April 2003. Available at SSRN: https://ssrn.com/abstract=416659

Louis K.C. Chan

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
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Jason J. Karceski

LSV Asset Management ( email )

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Chicago, IL 60654
United States
352-246-7674 (Phone)

Josef Lakonishok (Contact Author)

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-333-7185 (Phone)
217-244-3102 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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