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Sticky Expectations and the Profitability Anomaly

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  • JEAN‐PHILIPPE BOUCHAUD
  • PHILIPP KRÜGER
  • AUGUSTIN LANDIER
  • DAVID THESMAR

Abstract

We propose a theory of the “profitability” anomaly. In our model, investors forecast future profits using a signal and sticky belief dynamics. In this model, past profits forecast future returns (the profitability anomaly). Using analyst forecast data, we measure expectation stickiness at the firm level and find strong support for three additional model predictions: (1) analysts are on average too pessimistic regarding the future profits of high‐profit firms, (2) the profitability anomaly is stronger for stocks that are followed by stickier analysts, and (3) the profitability anomaly is stronger for stocks with more persistent profits.

Suggested Citation

  • Jean‐Philippe Bouchaud & Philipp Krüger & Augustin Landier & David Thesmar, 2019. "Sticky Expectations and the Profitability Anomaly," Journal of Finance, American Finance Association, vol. 74(2), pages 639-674, April.
    • Handle: RePEc:bla:jfinan:v:74:y:2019:i:2:p:639-674
    DOI: 10.1111/jofi.12734
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    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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