Research and Insights Library

Do Growth Expectations Help Explain Characteristic-Sorted Portfolio Returns?

This paper written by Gregg Fisher, CFA, Ronnie Shah, CFA, and Sheridan Titman, PhD, examines the question, “Do Growth Expectations Help Explain Characteristic-Sorted Portfolio Returns?” The authors find that accounting ratios (asset and sales growth, profitability, and equity dilution) that predict stock returns are associated with errors in analyst long-term growth forecasts. Specifically, accounting information that is associated with favorable long-term growth forecasts tends to predict negative analyst forecast errors and negative future excess returns. This and other evidence we present is consistent with the idea that biased long-term growth forecasts generate the observed return premia of popular characteristic-sorted portfolios.

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