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The Level and Persistence of Growth Rates

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  • Louis K.C. Chan
  • Jason Karceski
  • Josef Lakonishok

Abstract

Expected long-term earnings growth rates are crucial inputs to valuation models and for cost of capital estimates. We analyze historical long-term growth rates across a broad cross-section of stocks using several operating performance indicators. We test whether growth persists, and whether it is forecastable. Cases of very high growth have occurred, but are relatively rare. There is scant persistence in growth beyond chance, and limited ability to identify firms with high future long-term growth. IBES forecasts are too optimistic, and have low predictive power for long-term growth. Regressions using a variety of predictors confirm the low predictability in growth. Valuations that assume persistently high growth over prolonged periods rest on shaky foundations.

Suggested Citation

  • Louis K.C. Chan & Jason Karceski & Josef Lakonishok, 2001. "The Level and Persistence of Growth Rates," NBER Working Papers 8282, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:8282
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    References listed on IDEAS

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    Cited by:

    1. Rotheli, Tobias F., 2005. "The illusion of over-optimism in survey data: the case of manufacturers' selling prices," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 34(2), pages 151-159, March.
    2. Fabio Fornari, 2002. "The size of the equity premium," Temi di discussione (Economic working papers) 447, Bank of Italy, Economic Research and International Relations Area.
    3. Kartal Demirgunes, 2016. "The Effect of Liquidity on Financial Performance: Evidence from Turkish Retail Industry," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(4), pages 63-79, April.
    4. Stephen Millard & John Power, 2004. "The effects of stock market movements on consumption and investment: does the shock matter?," Bank of England working papers 236, Bank of England.

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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