Sticky Expectations and the Profitability Anomaly

Jean-Philippe Bouchaud, Philipp Krueger, Augustin Landier and David Thesmar
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Jean-Philippe Bouchaud: Capital Fund Management

No 16-60, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We propose a theory of one of the most economically significant stock market anomalies, i.e. the ``profitability'' anomaly. In our model, investors forecast future profits using a signal and sticky belief dynamics à la Coibion and Gorodnichenko (2012). 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 predictions of the model: (1) analysts are on average more pessimistic for high profit firms, (2) the profitability anomaly is stronger for stocks which are followed by stickier analysts, and (3) it is also stronger for stocks with more persistent profits.

Keywords: Stock market anomalies; Sticky expectations (search for similar items in EconPapers)
JEL-codes: G14 G17 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2016-11
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Sticky Expectations and the Profitability Anomaly (2019)
Working Paper: Sticky Expectations and the Profi tability Anomaly (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1660

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