Expectations and the Cross-Section of Stock Returns



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    • Harvard University. I thank Alberto Ades, Judith Chevalier, Kenneth Froot, Edward Glaeser, Gikas Hardouvelis, Steven Kaplan, Florencio López-de-Silanes, Patricia O'Brien, two anonymous referees, René Stulz, Thierry Wizman, and participants of the Chicago Finance Seminar for their helpful comments. I am deeply grateful to Andrei Shleifer for guidance and support and to Robert Vishny for many useful discussions. I gratefully acknowledge the contribution of I/B/E/S International Inc. for providing earnings forecast data, available through the Institutional Brokers Estimate System. This data has been provided as part of a broad academic program to encourage earnings expectations research. I thank Patricia Martin for editorial assistance.


Previous research has shown that stocks with low prices relative to book value, cash flow, earnings, or dividends (that is, value stocks) earn high returns. Value stocks may earn high returns because they are more risky. Alternatively, systematic errors in expectations may explain the high returns earned by value stocks. I test for the existence of systematic errors using survey data on forecasts by stock market analysts. I show that investment strategies that seek to exploit errors in analysts' forecasts earn superior returns because expectations about future growth in earnings are too extreme.