The Level and Persistence of Growth Rates

Authors

  • Louis K. C. Chan,

  • Jason Karceski,

  • Josef Lakonishok

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    • Chan is with the Department of Finance, College of Commerce and Business Administration, University of Illinois at Urbana-Champaign; Karceski is with the Department of Finance, Warrington College of Business Administration, University of Florida; and Lakonishok is with the Department of Finance, College of Commerce and Business Administration, University of Illinois at Urbana-Champaign, and NBER. We thank the editor, Rick Green; Cliff Asness; Kent Daniel; Ken French; an anonymous referee; and seminar participants at Dartmouth, Duke University, the London School of Economics Financial Markets Group, the NBER Behavioral Finance Fall 2000 workshop, the University of Illinois, Washington University, and the Western Finance Association 2001 meetings.


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.

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