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Earnings Belief Risk and the Cross-Section of Stock Returns*

Rajna Gibson Brandon and Songtao Wang

Review of Finance, 2020, vol. 24, issue 5, 1107-1158

Abstract: We show in a theoretical asset pricing model incorporating heterogeneous beliefs that the expected excess return on a risky asset depends on its exposure to the risk arising from innovations in the average belief of investors about the expected return of a representative asset. Using the actual EPS data and the analyst EPS forecast data provided by I/B/E/S, we construct a market-wide average belief measure, which we call “the earnings belief measure.” We find that the average return on stocks with high sensitivity to earnings belief shocks is 7.14% per year higher than that on stocks with low sensitivity. This positive relationship holds after accounting for traditional risk factors, is prominent among large-cap stocks, and is invariant across sentiment levels.

Keywords: Analysts’; EPS forecasts; Asset pricing; Earnings belief risk; EPS forecasting models; Heterogeneity of beliefs (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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