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The Level and Persistence of Growth Rates

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  • Louis K.C. Chan
  • Jason Karceski
  • Josef Lakonishok
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    Abstract

    Expected long-term earnings growth rates are crucial inputs to valuation models and for cost of capital estimates. We analyze historical long-term growth rates across a broad cross-section of stocks using several operating performance indicators. We test whether growth persists, and whether it is forecastable. Cases of very high growth have occurred, but are relatively rare. There is scant persistence in growth beyond chance, and limited ability to identify firms with high future long-term growth. IBES forecasts are too optimistic, and have low predictive power for long-term growth. Regressions using a variety of predictors confirm the low predictability in growth. Valuations that assume persistently high growth over prolonged periods rest on shaky foundations.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8282.

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    Date of creation: May 2001
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    Publication status: published as Chan, Louis K. C., Jason Karceski, and Josef Lakonishok. "The Level and Persistence of Growth Rates." Journal of Finance 58, 2 (April 2003): 643-84.
    Handle: RePEc:nbr:nberwo:8282

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    1. Welch, Ivo, 2000. "Views of Financial Economists on the Equity Premium and on Professional Controversies," The Journal of Business, University of Chicago Press, vol. 73(4), pages 501-37, October.
    2. Rafael La Porta & Josef Lakonishok & Andrei Shleifer & Robert Vishny, 1995. "Good News for Value Stocks: Further Evidence on Market Efficiency," NBER Working Papers 5311, National Bureau of Economic Research, Inc.
    3. Eugene F. Fama & Kenneth R. French, . "Forecasting Profitability and Earnings," CRSP working papers 358, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    4. Josef Lakonishok & Robert W. Vishny & Andrei Shleifer, 1993. "Contrarian Investment, Extrapolation, and Risk," NBER Working Papers 4360, National Bureau of Economic Research, Inc.
    5. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
    6. Louis K. C. Chan, 2001. "The Stock Market Valuation of Research and Development Expenditures," Journal of Finance, American Finance Association, vol. 56(6), pages 2431-2456, December.
    7. Camerer, Colin F, 1989. "Does the Basketball Market Believe in the 'Hot Hand'?," American Economic Review, American Economic Association, vol. 79(5), pages 1257-61, December.
    8. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272, September.
    9. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    10. Ball, Ray & Watts, Ross, 1972. "Some Time Series Properties of Accounting Income," Journal of Finance, American Finance Association, vol. 27(3), pages 663-81, June.
    11. Fama, Eugene F & French, Kenneth R, 1995. " Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-55, March.
    12. Chan, Louis K. C. & Jegadeesh, Narasimhan & Lakonishok, Josef, 1995. "Evaluating the performance of value versus glamour stocks The impact of selection bias," Journal of Financial Economics, Elsevier, vol. 38(3), pages 269-296, July.
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    Cited by:
    1. Fabio Fornari, 2002. "The size of the equity premium," Temi di discussione (Economic working papers) 447, Bank of Italy, Economic Research and International Relations Area.
    2. Stephen Millard & John Power, 2004. "The effects of stock market movements on consumption and investment: does the shock matter?," Bank of England working papers 236, Bank of England.

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