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Predictable EPS growth and the performance of value investing

Author

Listed:
  • Richard G. Sloan

    (University of Southern California)

  • Annika Yu Wang

    (Bauer College of Business, University of Houston)

Abstract

Previous research finds that EPS growth rates are difficult to predict and reasons that much of the observed cross-sectional variation in valuation ratios is due to variation in implied future stock returns. Yet the observed cross-sectional relation between valuation ratios and realized future stock returns is weak. We revisit these findings using a refined measure of expected EPS growth rates and document robust evidence of predictability in EPS growth rates. Moreover, we find that this predictable growth extends beyond two years into the future and is strongly reflected in observed valuation ratios. We show that combining valuation ratios with our refined measure of expected EPS growth rates improves forecasts of stock returns, though return predictability remains weak. Thus, we conclude that most of the variation in valuation ratios is driven by predictable EPS growth.

Suggested Citation

  • Richard G. Sloan & Annika Yu Wang, 2025. "Predictable EPS growth and the performance of value investing," Review of Accounting Studies, Springer, vol. 30(1), pages 33-78, March.
    • Handle: RePEc:spr:reaccs:v:30:y:2025:i:1:d:10.1007_s11142-023-09812-6
    DOI: 10.1007/s11142-023-09812-6
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    More about this item

    Keywords

    Earnings; Growth; Value; Analyst forecasts;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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