Affiliation:
1. University of Illinois at Chicago
2. University of South Carolina
3. The University of Kansas
Abstract
ABSTRACT
This study shows that the recent trajectory of a firm's profits predicts future profitability and stock returns. The predictive information contained in the trend of profitability is not subsumed by the level of profitability, earnings momentum, or other well-known determinants of stock returns. The profit trend also predicts the earnings surprise one quarter later, and analyst forecast errors over the following 12 months, suggesting that sophisticated investors underreact to the information in the profit trend. On the other hand, we find no evidence of investor overreaction, and our results cannot be explained by well-known risk factors.
JEL Classifications: G12; G14.
Publisher
American Accounting Association
Subject
Economics and Econometrics,Finance,Accounting
Cited by
34 articles.
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