Long-Term Growth Forecasts and Stock Recommendation Profitability

43 Pages Posted: 19 Nov 2010 Last revised: 5 Jun 2013

See all articles by Andreas Simon

Andreas Simon

Pepperdine University - Graziadio Business School

John Nowland

City University of Hong Kong

Date Written: May 13, 2013

Abstract

We investigate whether analysts’ long-term growth (LTG) forecasts are a signal of analyst effort, which is reflected in the long-term profitability of their stock recommendations. We develop a one-year-ahead LTG forecast likelihood score and execute a trading strategy that generates average abnormal returns of 2.9% per annum over our sample period (1995-2005). Furthermore, in out-of-sample testing during the 2006-2011 period our trading strategy, without portfolio rebalancing, earns abnormal returns of 2.5% per annum. In summary, this study illustrates previously undocumented long-term benefits accruing to investors from the information inherent in analyst LTG forecasts.

Keywords: Analyst forecasts, long-term earnings growth, stock recommendations, trading strategy

JEL Classification: G11, G14

Suggested Citation

Simon, Andreas and Nowland, John, Long-Term Growth Forecasts and Stock Recommendation Profitability (May 13, 2013). Available at SSRN: https://ssrn.com/abstract=1697410 or http://dx.doi.org/10.2139/ssrn.1697410

Andreas Simon

Pepperdine University - Graziadio Business School ( email )

Malibu, CA
United States

HOME PAGE: http://https://bschool.pepperdine.edu/academics/faculty/andreas-simon/

John Nowland (Contact Author)

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

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