Speed of Learning About Firms' Profitability and Their Price Multiples: A Global Perspective

Abstract

We present direct global evidence of declining analyst forecast errors, return volatility, and M/B ratio with progression in a firm’s age in the context of a learning model which focuses on the positive numerator effects of uncertainty about the firm’s profitability. The convex relation between a firm’s age and its M/B is pervasive over time and across countries after controlling for future growth rate, leverage, size, dividend policy, and future return. Strict enforcement of insider trading laws, higher feasibility of short selling, and dominance of local versus foreign investors increase the learning speed and fuel quicker achievement of long run equilibrium valuations.