Final published version
Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Predicting long-term earnings growth from multiple information sources
AU - Gao, Zhan
AU - Wu, Wan-Ting
PY - 2014/3
Y1 - 2014/3
N2 - While expected long-term earnings growth plays a pivotal role in valuation and investment applications, its common proxy, analysts’ long-term growth forecasts (LTG), is well known for being over-optimistic. Guided by a stylized growth model, this paper uses three information sources to improve growth prediction—analysts’ forecasts, stock prices, and financial statements. We find that the growth model using LTG, past earnings growth, the forward earnings-to-price ratio and past returns as predictors is unbiased and most accurate among the models considered in this paper. We further show that this growth prediction results in higher trading profits, more accurate equity predictions, and more reliable estimates of cost of equity. The findings suggest that this improvement in growth prediction leads to economically significant consequences in valuation and investment applications.
AB - While expected long-term earnings growth plays a pivotal role in valuation and investment applications, its common proxy, analysts’ long-term growth forecasts (LTG), is well known for being over-optimistic. Guided by a stylized growth model, this paper uses three information sources to improve growth prediction—analysts’ forecasts, stock prices, and financial statements. We find that the growth model using LTG, past earnings growth, the forward earnings-to-price ratio and past returns as predictors is unbiased and most accurate among the models considered in this paper. We further show that this growth prediction results in higher trading profits, more accurate equity predictions, and more reliable estimates of cost of equity. The findings suggest that this improvement in growth prediction leads to economically significant consequences in valuation and investment applications.
KW - Long-term growth
KW - earnings growth prediction
KW - analysts’ forecasts
KW - Equity valuation
KW - Valuation ratio
U2 - 10.1016/j.irfa.2014.01.009
DO - 10.1016/j.irfa.2014.01.009
M3 - Journal article
VL - 32
SP - 71
EP - 84
JO - International Review of Financial Analysis
JF - International Review of Financial Analysis
SN - 1057-5219
ER -