Earnings Growth Uncertainty and the Cross-section of Equity Valuation

60 Pages Posted: 15 Oct 2022 Last revised: 17 Oct 2022

See all articles by Ella Patelli

Ella Patelli

UBC - Sauder School of Business

Date Written: September 29, 2022

Abstract

We provide direct empirical evidence that higher growth uncertainty is associated with lower equity valuation. To do so, we develop an equity valuation model where the investor learns about the unobservable expected earnings growth. Expected earnings growth can be more difficult to assess for some firms than others, depending on the available information. This implies cross-sectional differences in growth uncertainty. We provide a theoretically founded measure of growth uncertainty, which we structurally estimate at the firm level. This measure is then shown to drive cross-sectional variations of the market-to-book ratio, both theoretically and empirically, thereby contributing to our understanding of equity valuation ratios.

Keywords: Equity valuation, uncertainty, learning, analyst forecasts

Suggested Citation

Patelli, Ella, Earnings Growth Uncertainty and the Cross-section of Equity Valuation (September 29, 2022). Available at SSRN: https://ssrn.com/abstract=4233634 or http://dx.doi.org/10.2139/ssrn.4233634

Ella Patelli (Contact Author)

UBC - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

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