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The Level and Persistence of Growth Rates

Louis K. C. Chan, Jason Karceski and Josef Lakonishok
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Louis K. C. Chan: Department of Finance, College of Commerce and Business Administration, University of Illinois at Urbana-Champaign;
Jason Karceski: Department of Finance, Warrington College of Business Administration, University of Florida;
Josef Lakonishok: Department of Finance, College of Commerce and Business Administration, University of Illinois at Urbana-Champaign, and NBER.

Journal of Finance, 2003, vol. 58, issue 2, 643-684

Abstract: Expectations about long-term earnings growth are crucial to valuation models and cost of capital estimates. We analyze historical long-term growth rates across a broad cross section of stocks using several indicators of operating performance. We test for persistence and predictability in growth. While some firms have grown at high rates historically, they are relatively rare instances. There is no persistence in long-term earnings growth beyond chance, and there is low predictability even with a wide variety of predictor variables. Specifically, IBES growth forecasts are overly optimistic and add little predictive power. Valuation ratios also have limited ability to predict future growth. Copyright 2003 by the American Finance Association.

Date: 2003
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Handle: RePEc:bla:jfinan:v:58:y:2003:i:2:p:643-684