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The Level and Persistence of Growth Rates

  • Louis K.C. Chan
  • Jason Karceski
  • Josef Lakonishok
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    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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    File URL: http://www.nber.org/papers/w8282.pdf
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    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
    Note: AP
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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