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Expectations and Share Prices


Author Info

  • Edwin J. Elton

    (New York University)

  • Martin J. Gruber

    (New York University)

  • Mustafa Gultekin

    (New York University)

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    It is generally believed that security prices are determined by expectations concerning firm and economic variables. Despite this belief there is very little research examining expectational data. In this paper we examine how expectations concerning earning per share effect share price. We first show that knowledge concerning analyst's forecasts of earnings per share cannot by itself lead to excess returns. Any information contained in the consensus estimate of earnings per share is already included in share price. Investors or managers who buy high growth stocks where high growth is determined by consensus beliefs should not earn an excess return. This is not due to earnings having no effect upon share price since knowledge of actual earnings leads to excess return. Much larger excess returns are earned if one is able to determine those stocks for which analysts most underestimate return. Finally, the largest returns can be earned by knowing which stocks for which analysts will make the greatest revision in their estimates. This pattern of results suggests that share price is affected by expectations about earnings per share. Given any degree of forecasting ability managers can obtain best results by acting on the differences between their forecasts and concensus forecasts.

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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 27 (1981)
    Issue (Month): 9 (September)
    Pages: 975-987

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    Handle: RePEc:inm:ormnsc:v:27:y:1981:i:9:p:975-987

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    Keywords: finance; finance: investment;


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    Cited by:
    1. Elkin Castaño Vélez & Luis Fernando Melo Velandia, 2000. "Metodos de combinacion de pronosticos: una aplicacion a la inflacion," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 52, pages 113-165, Enero Jun.
    2. Doukas, John A. & Phillip J. McKnight & Christos Pantzalis, 2002. "Security Analysis, Agency Costs, and UK Firm Characteristics," Royal Economic Society Annual Conference 2002 65, Royal Economic Society.
    3. Florian Esterer & David Schröder, 2014. "Implied cost of capital investment strategies: evidence from international stock markets," Annals of Finance, Springer, vol. 10(2), pages 171-195, May.
    4. Arnulfo Rodríguez & Gerardo Zúñiga & Pedro N. Rodríguez, 2008. "Analysis of the Performance of Mexican Pension Funds: Evidence from a Stationary Bootstrap Application," Working Papers 2008-02, Banco de México.
    5. Huijgen, Carel & Plantinga, Auke, 1999. "Analysts' earnings forecasts and international asset allocation," Research Report 99E38, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    6. Doukas, John A. & Kim, Chansog & Pantzalis, Christos, 2006. "Divergence of opinion and equity returns under different states of earnings expectations," Journal of Financial Markets, Elsevier, vol. 9(3), pages 310-331, August.
    7. Alain Schatt & Gaétan Breton, 2000. "Rôle et caractérisation de l’analyse financière," Revue d'Économie Financière, Programme National Persée, vol. 59(4), pages 147-161.
    8. David Schröder, 2005. "The Implied Equity Risk Premium - An Evaluation of Empirical Methods," Bonn Econ Discussion Papers bgse13_2005, University of Bonn, Germany.
    9. Ho, Li-Chin Jennifer & Hassell, John M. & Swidler, Steve, 1995. "An empirical examination of the dispersion and accuracy of analyst forecasts surrounding option listing," Review of Financial Economics, Elsevier, vol. 4(2), pages 171-185.
    10. Lim, Tiong Kiong & Kong, Hwee Chi, 2004. "New evidence on price impact of analyst forecast revisions," International Review of Financial Analysis, Elsevier, vol. 13(2), pages 161-190.
    11. Higgins, Huong, 2013. "Can securities analysts forecast intangible firms’ earnings?," International Journal of Forecasting, Elsevier, vol. 29(1), pages 155-174.
    12. Guerard, John Jr. & Blin, John & Bender, Steve, 1998. "Forecasting earnings composite variables, financial anomalies, and efficient Japanese and U.S. portfolios," International Journal of Forecasting, Elsevier, vol. 14(2), pages 255-259, June.
    13. Schröder, David & Esterer, Florian, 2012. "A new measure of equity duration: The duration-based explanation of the value premium revisited," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62077, Verein für Socialpolitik / German Economic Association.


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