Earnings Growth Research Articles

Price Informativeness with Equity Market Factors

Price informativeness measures how and when information is aggregated into asset prices. The authors study the price informativeness of realized earnings growth for US stocks, with a focus on exposures to factors that have historically outperformed the market index. Their study includes the largest 1,000 stocks from 1975 to 2019 and approximately 180,000 individual corporate net income observations aligned by report date. Stock returns are sensitive to concurrent and realized earnings growth reports up to 15 months into the future, but not to old earnings reports. The decomposition of value, momentum, small size, low beta, and profitability factor active returns into components that are explained and unexplained by earnings aids in understanding the anomalous nature of their positive market-relative performance. The active returns to momentum stocks are largely attributable to the growth of realized earnings over the next several quarters. Low beta, small size, and profitability stocks have little of their active returns explained by realized earnings, suggesting the anomalies are associated with other drivers, such as changes in expected long-term earnings growth and discount rates. In contrast, the active returns to value stocks explained by concurrent and future realized earnings are negative.

THE EFFECT OF LEVERAGE, FIRM SIZE, EARNING GROWTH, AND EARNING PERSISTENCE ON EARNING RESPONSE COEFFICIENT

This study aims to investigate the effect of leverage, firm size, earnings growth, and earning persistence on earnings response coefficient. The population used in this study are all manufacturing companies listed in Indonesia Stock Exchange from 2015 until 2019 and had positive earnings before tax. Consequently, the samples in this research are 68 manufacturing companies so that the observations are 340. For examining data, this research uses a panel data regression model. After running the chow test and Lagrange multiplier test, the most suitable method for the regression model is the common effect model. This research shows that leverage and firm size do not influence earning response coefficient. Meanwhile, earnings growth and earnings persistence have a positive effect on the earnings response coefficient.
 Keywords: Earning growth; earning persistence; earning response coefficient; firm size; leverage

Industry-level versus firm-level forecasts of long-term earnings growth

This study assesses whether industry-level forecasts of long-term earnings growth (LTG) are more accurate than firm-level LTG forecasts commonly employed in prior work. I find that industry-level forecasts of LTG are more accurate than (i) firm-level forecasts, (ii) the median I/B/E/S consensus analyst LTG forecast, (iii) a zero growth forecast, and (iv) an LTG forecast combining industry and firm information. Industry-level forecasts are more accurate than firm-level forecasts for firms experiencing extreme growth and firms with high earnings variability, and are less accurate for firms in the Decline life-cycle stage.

Unjust and Unreasonable: Misuse of the Dividend Growth Model in Public Utility Rate Setting

The dividend (Gordon) growth model (DGM) is a simple stock valuation equation in four variables: (1) price; (2) next-period cash flow; (3) a perpetual and constant rate of growth in the periodic cash flow; and (4) a perpetually-constant discount rate. The DGM can be expressed to equate the perpetually-constant discount rate to the cash flow yield on the current price plus the perpetual growth rate in the periodic cash flow. But that expression would provide a reliable estimate of a real-world discount rate only if both the cash flow yield and the growth rate used as inputs to the model were perpetually constant. In rate-regulation proceedings, however, utility expert witnesses use the DGM with current (not perpetual) dividend yields and analysts' 3-5 year (not perpetual) earnings growth rates. This practice contributes to approved equity cost of capital awards above plausible cost of capital estimates, shifting wealth from rate payers to utilities.

Practical Applications of Should You Have More China in Your Portfolio? Putting Common Arguments for Increased China Exposure to the Test

In <b>Should You Have More China in Your Portfolio? Putting Common Arguments for Increased China Exposure to the Test</b>, from the Winter 2020 issue of <b><i>The Journal of Index Investing</i></b>, authors <b>Jason Hsu</b>, <b>Xiang Liu</b>, and <b>Phillip Wool</b> of <b>Rayliant Global Advisors</b> review the most common arguments for increasing allocation to Chinese onshore and offshore equities within portfolios. The key bases for such arguments include China’s total GDP, the rapid rate of GDP growth, eventual further index inclusion, low correlation with other market equities, equity risk premiums, and greater alpha opportunity. Through close empirical analyses, the authors determine that greater allocation to Chinese equities may be a sound investment decision, though it was supported by only some of the considerations. Specifically, the authors reject the hypothesis that China’s large total GDP, GDP growth, and equity market capitalization indicate an opportunity for increased portfolio returns. However, China’s low correlation with other market equities, higher opportunity for alpha, and faster earnings growth did support the argument for greater allocation to Chinese equities.

Is automatic enrollment consistent with a life cycle model?

AbstractWe examine retirement saving for young adults in a life cycle model. We find that optimal retirement saving is zero for liquidity‐constrained young adults who anticipate significant earnings growth. With a plausible age‐earnings profile for college‐educated workers, retirement saving does not begin until the late 30s or early 40s. Workers facing a flat earnings profile begin saving much sooner. Participating may be optimal for younger workers facing steep earnings profiles if they anticipate switching jobs and cashing out after 1–2 years. Our results suggest that automatically enrolling workers, regardless of age, is not consistent with a life cycle model.

The Labor Market Earnings of Veterans: Is Military Experience More or Less Valuable than Civilian Experience?

We assess the labor market experiences and earnings of military veterans, focusing on three major outcomes, among others, controlling for a wide array of demographic characteristics and industry and occupational fixed effects. First, we find that male and female veterans receive civilian earnings nearly equivalent to nonveteran men and women. This finding implies that military experience is valued in the labor market similarly to foregone civilian experience. Second, veterans are clustered in occupations with somewhat lower than average employment and real earnings growth, and in metropolitan areas with lower levels and growth of real GDP per capita. Third, veterans experience lower returns to formal educational investments (e.g., college) than do nonveterans. Veterans realize earnings gains from professional licenses, but their returns are lower than for nonveterans. These gains are concentrated among science, technology, engineering, and math (STEM) jobs, suggesting that veterans could help meet the growing demand for tech talent and artificial intelligence skills.

Aggregate accounting research and development expenditures and the prediction of real gross domestic product

The role of accounting information for public policy making has received increased attention in recent years. Konchitchki and Patatoukas (2014a,b) demonstrate that growth in aggregate accounting earnings can predict future growth in nominal and real Gross Domestic Product (GDP). We extend the micro to macro literature by decomposing earnings into the R&D and pre-R&D components. Using the Almon (1965) finite distributed lag model, we find that both components can predict future real GDP growth with different lead-lag structures. Importantly, this decomposition significantly increases the explanatory power of the predictive model using accounting information. Aggregate accounting R&D can predict real GDP through the personal consumption, business investment, and net export channels of GDP. Our study extends prior research on the forecasting usefulness of accounting information at the aggregate level and has practical implications for macro forecasting and for public policy making regarding innovative activities of publicly listed firms.

What Has Gone Wrong With Japan’s Stock Performance Over the Last Three Decades?

Japan has a poor stock performance compared with the US in three decades (1989-2019). At the end of 1989, the Nikkei 225 Index reached its all-time high (38,916); by the end of 2019, the index was 23,657, a change of −39% over the entire period. Meanwhile, the S&amp;P 500 Index increased from 353 to 3,231, a change of 815%. To comprehend this matter, we investigate the areas of economic conditions, corporate governance, corporate financial policies, corporate financial performance, and relative valuation. Our research method is a combination of qualitative and quantitative approaches. Our analyses reveal a variety of problems: slow GDP growth, weak legal protections and low governance ratings, insiders-dominated and cross-holding ownership structure, excess financial assets, low profitability, slow growth of earnings and revenues, and contraction of relative valuation. In the most recent decade (2009-2019), we note some improvements: expansionary monetary policy, productivity growth, better corporate governance, increased dividend payments and stock repurchases, earnings growth, and enhanced profitability. Therefore, Japan’s transformation is substantial, though it is gradual and incomplete.

Editors' Note

This issue's symposium on future research directions in forensic economics originated with papers that were presented at the January 4, 2020, National Association of Forensic Economics (NAFE) session “NAFE: An Agenda for Future Research” at the Allied Social Science Associations annual meeting in San Diego, California. The impetus for the session was to honor Jack Ward, the first editor of the Journal of Forensic Economics (JFE) by having him provide insights on what research in forensic economics has contributed to the current knowledge of practitioners, as well as his thoughts on the future directions of forensic economics research. This symposium contains papers on the topic of future research directions in forensic economics that were prepared by the presenters at the San Diego meeting.Jack Ward's paper suggests that there have been advances over the last three decades in forensic economics that include the Markov analyses of worklife expectancy; Expectancy Data's Dollar Value of a Day and Full-time Earnings in the United States that have advanced the projection of replacement household services and lost earnings; research based on Bureau of Labor Statistics Family Expenditure Survey data that has added greater precision to measures of self-consumption of earnings; and papers that have helped clarify differences between measuring probable earnings and earning capacity. Ward's paper concludes with a list of topics for further research in the forensic economics literature that includes more work on the role of race and gender in determining earnings; modeling dynamic changes in industry specific employment and wage growth; and the incorporation of Bayesian methodologies in lost wage projections, including the assignment of meaningful probabilities to outcomes.The paper by Michael Brookshire and Frank Slesnick discusses what their 10 surveys of NAFE members have revealed about important research topics. They argue that their surveys suggest that NAFE members place high importance on research on worklife of the disabled, worklife of the self-employed, personal consumption, and household services. Brookshire and Slesnick also offer, based on their experience as practitioners and researchers, the following agenda: whole-time approach to damages estimation; forensic economics in the classroom; a paper summarizing what is known as a result of the papers published in the JFE state paper series; tailoring, i.e., accounting for qualitative factors and variables omitted from standard economic models; the market for forensic economists; the definition of earning capacity; and what is meant by reasonable economic probability.The paper by Steven Shapiro suggests that despite the large body of published research in forensic economics, there are still controversial topics that are lacking consensus. Shapiro suggests that the controversial areas that should be the focus of research include the choice of interest rates for discounting; interest rates, earnings growth and inflation; interest rates, growth in medical costs and inflation; how many years of earnings history is necessary to project base earnings and earnings history; alternative approaches to hedonic damages; and punitive damages. Shapiro expresses the hope that research on these topics will improve the reliability and validity of the work of forensic economists.

An Agenda for Future Research in Forensic Economics: New Approaches to Viewing Controversial Topics

AbstractDespite a large body of published research in forensic economics, there are still controversial topics that are lacking consensus. This paper presents an agenda for research on controversial topics in the hope that the results of such research will improve the reliability and validity of the work of forensic economists. Specifically, the paper presents suggestions for research on the choice of interest rates for discounting; interest rates, earnings growth and inflation; interest rates, growth in medical costs and inflation; how many years of earnings history is necessary to project base earnings and earnings history; alternative approaches to hedonic damages; and punitive damages.

Value versus Glamour Stocks: The Return of Irrational Exuberance?

Value stocks have endured a period of severe underperformance until recently. This article shows that the value spreads between valuations of value stocks and their most expensive peers expanded in all regions and sectors during this period of underperformance, reaching the same extreme high levels last seen at the peak of the tech bubble in 2000. Investors have rerated expensive stocks relative to their value peers, thus reflecting an expanding difference in their respective earnings growth forecasts. There are signs this trend may now have changed. Value spreads may have started a new period of compression at the end of 2020, led by shrinking differences in earnings growth forecasts. A compression in value spreads would be favorable for value stocks, small-capitalization stocks, and multifactor strategies. <b>TOPICS:</b>Security analysis and valuation, analysis of individual factors/risk premia, financial crises and financial market history, performance measurement <b>Key Findings</b> ▪ The spread between valuations of value stocks relative to their expensive peers reached levels last seen in the 2000 tech bubble in every region and sector investigated. This expansion of value spreads explains the recent underperformance of value stocks. ▪ The expansion of value spreads reflected an increasing difference between earnings growth forecasts for expensive and value stocks. Value spreads and earnings growth forecast differences peaked in 2020, suggesting that a regime of value spread compression has begun. ▪ Value spread compression periods are characterized by strong outperformance of value stocks relative to expensive peers and by outperformance of smaller-cap stocks relative to larger-cap stocks. Other sector-neutral styles and their multifactor combinations also do well.

Foundations of Climate Investing: How Equity Markets Have Priced Climate-Transition Risks

Countries have set varying targets to reduce greenhouse gas emissions in line with the Paris Agreement’s goal of keeping the increase in global average temperatures to well below 2°C. In this article, the authors examine to what extent climate risk has been priced into equity markets and whether climate change can be modeled using a typical risk model structure. They develop the fundamental economic transmission channels to explain the potential impact of climate change on equity prices, including empirical evidence for climate policies and green technology as financial risk drivers. They also study the impact of climate-transition risk on valuation levels and trends. They conclude with a discussion of how to measure and categorize companies’ climate-risk exposures and how to integrate climate-transition risks into risk models. <b>TOPICS:</b>ESG investing, security analysis and valuation, tail risks <b>Key Findings</b> ▪ The authors identified economic transmission channels showing how regulatory policies and green technology influence financial markets. In developed markets outside the United States, more carbon-efficient companies experienced stronger performance over a seven-year study period. They found companies’ green revenue share was clearly associated with higher earnings growth and relatively better stock performance within a given sector. ▪ Next, they looked at the relationship between companies’ climate-transition risk profiles and their valuation levels, finding that carbon-intensive companies experienced declining valuation in terms of price-to-book ratios than their less carbon-intensive sector peers—suggesting that markets have discounted the book value of carbon-intensive companies during the study period. In contrast, companies with significant green revenues saw their price-to-earnings ratios increase relative to their sector peers. ▪ Companies’ earnings growth and stock performance was directly related to their greenhouse gas emissions. Using five MSCI low carbon transition categories, the authors found that the riskiest category (stranded assets) had the weakest performance and the solutions category the strongest during the study period. Although most performance differences were explained by the industry factor, there was a significant stock-specific return that showed a strong correlation to companies’ climate transition-risk profile.

Asset Pricing with Fading Memory

Abstract Building on evidence that lifetime experiences shape individuals’ macroeconomic expectations, we study asset prices in an economy in which a representative agent learns with fading memory about unconditional mean endowment growth. With IID fundamentals, constant risk aversion, and memory decay calibrated to microdata, the model generates a high and strongly countercyclical objective equity premium, while the subjective equity premium is virtually constant. Consistent with this theory, experienced payout growth (a weighted average of past growth rates) is negatively related to future stock market excess returns and subjective expectations errors in surveys, and positively to analysts’ forecasts of long-run earnings growth.

Value Investing: Capitulation or Opportunity?

Value stocks endured a period of severe underperformance until recently. We show that the value spreads between valuations of value stocks and their most expensive peers expanded in all regions and sectors during this period of underperformance, reaching the same extreme high levels last seen at the peak of the tech bubble in 2000. Investors have re-rated expensive stocks relative to their value peers reflecting an expanding difference in their respective earnings growth forecasts. There are signs this trend may now have changed. Value spreads may have started a new period of compression at the end of 2020, a trend led by shrinking differences in earnings growth forecasts. A compression in value spreads would be favorable for value stocks, smaller capitalization stocks and for multi-factor strategies.

Why strong pay growth isn't what it seems

▪ UK wages have recently grown at a pace not seen for over a decade. But rather than a sign of nascent inflationary pressure, changes in the makeup of jobs have exaggerated headline pay, and comparisons with a depressed 2020 will compound this over the next few months. ▪ Lower‐paid staff have been more likely to lose their jobs during the pandemic, cutting the weight of these jobs in the average pay calculation. And as people on furlough return to work, y/y earnings growth is likely to hit a record high. ▪ These effects will fade, particularly if new jobs are richer in lower‐paid roles. Thereafter, the post‐Covid world presents upside and downside risks to pay growth. On balance, a return to the pre‐pandemic norm of 2.5%–3% y/y is likely.

The Condition of Companies and their Growth Based on the Example of Companies Included in WIG and DAX Indices

The purpose of the article/hypothesis: The paper discusses the problem of condition of companies together with their growth measured by earnings per share, sales, assets and equity. The condition of a company in a capital market is considered good when the goal of the business is achieved, namely the increase of value that occurs with the increase of earnings per share. We assume that the condition of companies measured by Altman’s Z-score Model scores is related to their growth, and ratios applied in this model influence the growth of companies measured by EPS, sales, assets and equity. The research is conducted in two groups of companies, one representing WIG listed entities and the other one comprising DAX listed companies.&#x0D; Methodology: The growth of earnings per share is considered as a measure of companies’ value creation. The growth of EPS should be related to the growth of sales, assets and equity according to the growth theory. To analyze the influence of Altman’s Z-score Model on the growth of EPS, sales, assets and equity, the Pearson and Spearman correlation is applied in the first place. Moreover, logit models are applied to analyze the influence of ratios composing the Altman’s Z-score Model on the growth of EPS, sales, assets and equity.&#x0D; Results of the research: Discriminant models can be applied for the assessment of the economic condition of companies but the interpretation of the results should take into account the fact that risky strategies identified by Altman’s Z-score Model as dangerous are related to the higher growth of earnings per share, therefore, there should be a negative relationship between Altman’s Z-score Model scores and EPS growth and it was confirmed in this study.

ANALISIS FAKTOR PENENTU PRICE EARNINGS RATIO: STUDI PADA PERUSAHAAN YANG TERDAFTAR DI BURSA EFEK INDONESIA

This study aims to determine the effect of the Dividend Payout Ratio, Earnings Growth Ratio, Debt to Asset Ratio, and Dividend Per Share on the Price Earnings Ratio of companies listed on the LQ45 Index in the Indonesian capital market for the 2016-2018 period. This study is an explanatory research. Analysis of the data used is multiple linear regression analysis with Ordinary Least Squares (OLS) approach. The results showed that the Dividend Payout Ratio and Dividend Per Share had a significant effect on the Price Earnings Ratio. Meanwhile, Earnings Growth Ratio and Debt to Asset Ratio have no significant effect on Price Earnings Ratio. In addition, an interesting finding in this study is that the Dividend Payout Ratio is the most dominant ratio in determining the Price Earnings Ratio. The results also show that the coefficient of determination (R2) is 73.6%. This explains that the ratios used in this study are important to determine or influence the value of the Price Earnings Ratio.

Which resource acquisition acts drive growth of informal firms? Evidence from Zambia

PurposeThe study seeks to differentiate informal firms with high-growth prospects by their resource acquisition acts and to improve identification of growth-oriented informal firms for effective design and targeting of support measures.Design/methodology/approachAn original set of firm-level data was collected using face-to-face survey in Lusaka, Zambia. Six clearly defined criteria were used to sample informal firms, apart from general informal business. Regression analyses were conducted to test the association of different resource acquisition acts with two growth dimensions: number of employees and business earnings of the 325 informal firms sampled.FindingsAccessing clientele beyond local market, linking up with formal businesses and acquiring information and knowledge via online sources were found influential to growth in business earnings. Surprising, acquisition of finance and skills showed no effect. Employment expansion, though widely used, may not be a stable indicator of informal firm growth.Research limitations/implicationsThe study highlights the relevance of the emerging entrepreneurship perspective to understanding the topic. It cautions against pre-setting a size threshold for sampling informal firms and against relying on employment expansion as the sole proxy of growth.Practical implicationsThe findings prompt a rethink of the effectiveness of conventional support programmes to drive growth of informal firms such as funding and training. Directing support measures to target growth-oriented informal firms will lead to creation of decent and sustainable jobs and formalisation.Originality/valueWith an original firm-level dataset, the study challenges a long-held assumption that growth of informal firm is negligible and shows that segments of informal firms are sustainable and could attain significant growth and derives new insights into researching and supporting informal firm growth.

Price Informativeness with Equity Market Factors

Price informativeness measures how and when information is aggregated into asset prices. We study the price informativeness of realized earnings growth for U.S. stocks with a focus on exposures to factors that have historically outperformed the market index. Our study includes the largest one thousand stocks from 1975 to 2019 and approximately 180 thousand individual corporate net income observations aligned by report date. Stock returns are sensitive to concurrent and realized earnings growth reports up to 15 months into the future, but not to old earnings reports. The decomposition of Value, Momentum, Small Size, Low Beta, and Profitability factor active returns into components that are explained and unexplained by earnings aids in understanding the anomalous nature of their positive market-relative performance. The active returns to Momentum stocks are largely attributable to the growth of realized earnings during the next several quarters. Low Beta, Small Size, and Profitability stocks have little of their active returns explained by realized earnings, suggesting the anomalies are associated with other drivers such as changes in expected long-term earnings growth and discount rates. In contrast, the active returns to Value stocks explained by concurrent and future realized earnings are negative.