The Role of Net Income Growth in Explaining Long-Horizon Stock Returns

Abstract

This study assesses relations between decade-horizon compound returns to U.S. common stocks and contemporaneous accounting-based firm characteristics, including net income growth, sales growth, asset growth, and average profitability (income-to-assets ratio). The results indicate that stock portfolios created by sorting on any of the four variables are associated economically large and statistically significant return differentials ranging from 13% to 29% per year, both in recent (1990s and later) as well as earlier decades. A direct statistical horserace shows that, among these variables, net income growth is by far the most important for explaining differences in decade-horizon returns across firms.