Long-Term Earnings Growth Forecasts, Limited Attention, and Return Predictability

Zhi Da, Mitch Warachka
2009 Social Science Research Network  
Long-term earnings expectations are critically important to stock price valuations. We identify relative optimism and relative pessimism in long-term analyst forecasts by comparing these forecasts with implied short-term earnings growth forecasts across firms within the same industry. Stocks with relatively optimistic and relatively pessimistic long-term analyst forecasts have negative and positive risk-adjusted returns, respectively. This return predictability depends critically on short-term
more » ... ally on short-term forecasts since relative optimism and relative pessimism originate from the slow diffusion of information from short-term to long-term analyst forecasts. Our results indicate that market participants have limited attention regarding the long-term earnings implications of information.
doi:10.2139/ssrn.1107637 fatcat:2ihjhmr65rgllmoh4teroil22y