Expectations and the Cross-Section of Stock Returns

J. OF FINANCE, Vol. 51 No. 5, December 1996

Posted: 26 Feb 1997

See all articles by Rafael La Porta

Rafael La Porta

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Abstract

Previous research has shown that stocks with low prices relative to book value, cash flow, earnings, or dividends (that is, value stocks) earn high returns. Value stocks may earn high returns because they are more risky. Alternatively, systematic errors in expectations may explain the high returns earned by value stocks. I test for the existence of systematic errors using survey data on forecasts by stock market analysts. I show that investment strategies that seek to exploit errors in analysts' forecasts earn superior returns because expectations about future growth in earnings are too extreme.

JEL Classification: G14

Suggested Citation

La Porta, Rafael, Expectations and the Cross-Section of Stock Returns. J. OF FINANCE, Vol. 51 No. 5, December 1996, Available at SSRN: https://ssrn.com/abstract=8142

Rafael La Porta (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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