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Earnings Belief Risk and the Cross-Section of Stock Returns

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  • Rajna Gibson Brandon
  • Songtao Wang

Abstract

We show in a theoretical asset pricing model incorporating heterogeneous beliefs that the expected excess return on a risky asset depends on its exposure to the risk arising from innovations in the average belief of investors about the expected return of a representative asset. Using the actual EPS data and the analyst EPS forecast data provided by I/B/E/S, we construct a market-wide average belief measure, which we call “the earnings belief measure.” We find that the average return on stocks with high sensitivity to earnings belief shocks is 7.14% per year higher than that on stocks with low sensitivity. This positive relationship holds after accounting for traditional risk factors, is prominent among large-cap stocks, and is invariant across sentiment levels.

Suggested Citation

  • Rajna Gibson Brandon & Songtao Wang, 2020. "Earnings Belief Risk and the Cross-Section of Stock Returns," Review of Finance, European Finance Association, vol. 24(5), pages 1107-1158.
    • Handle: RePEc:oup:revfin:v:24:y:2020:i:5:p:1107-1158.
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    File URL: http://hdl.handle.net/10.1093/rof/rfaa001
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    Cited by:

    1. Xu, Shaojun, 2023. "Behavioral asset pricing under expected feedback mode," International Review of Financial Analysis, Elsevier, vol. 86(C).

    More about this item

    Keywords

    Analysts’; EPS forecasts; Asset pricing; Earnings belief risk; EPS forecasting models; Heterogeneity of beliefs;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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