Long-term Earnings Research Articles

Consequences of Interstitial Cystitis/Bladder Pain Symptoms on Women's Work Participation and Income: Results from a National Household Sample

We describe differences in work participation and income by bladder symptom impact and comorbidities among women with interstitial cystitis/bladder pain syndrome. Cross-sectional data from 2,767 respondents younger than 65 years identified with interstitial cystitis/bladder pain syndrome symptoms were analyzed. The data were taken from the RAND Interstitial Cystitis Epidemiology (RICE) survey, and included retrospective self-reports of interstitial cystitis/bladder pain syndrome impact, severity, years since onset, related comorbidities (depressive symptomatology, number of conditions), work participation and income, and personal characteristics. Multiple regressions predicted 5 current work outcomes of works now, kept from working by pain, missed work days, days worked when bothered by symptoms and real income change since symptom onset. Controlling for work status at symptom onset and personal characteristics, greater bladder symptom impact predicted a greater likelihood of not now working, kept more days from working by pain, missed more work days and working more days with symptoms. More depressive symptomatology and greater number of comorbidities predicted reduced work participation. Women experienced no growth in real income since symptom onset. Measures of symptom severity were not associated with any of the economic outcomes. Greater interstitial cystitis/bladder pain syndrome symptom impact, depressive symptomatology and count of comorbidities (but not symptom severity) were each associated with less work participation and leveling of women's long-term earnings. Management of bladder symptom impact on nonwork related activities and depressive symptomatology may improve women's work outcomes.

Analysts' Reluctance to Voice Conservative Opinions and the Informational Value of Long-term Earnings Growth Forecasts

In explaining the poor informational value of analysts’ long-term earnings growth forecasts, studies have focused on the excessively aggressive forecasts induced by analysts’ incentives and/or cognitive biases. This study reveals that forecasts’ poor informational value is driven by analysts’ reluctance to issue conservative forecasts, which may also be induced by their incentives and/or biases. We predict that this reluctance allows each firm’s conservative forecast to be influenced by the firm’s past performance and the noisy predictors of high-growth firms. Consistent with our prediction, we find that each firm’s most conservative forecasts are those most strongly influenced by past performance and have the least predictive power.

Analystss Reluctance to Voice Conservative Opinions and the Informational Value of Long-Term Earnings Growth Forecasts

The extant research indicates that analysts’ long-term earnings growth forecasts are especially optimistic for past winners, and have little predictive power to distinguish between high-growth and low-growth firms. In explaining the poor informational value of analysts’ long-term earnings growth forecasts, studies have focused on the excessively aggressive forecasts induced by analysts’ inflation of their true beliefs. This study reveals that the forecasts’ poor informational value is driven by analysts’ reluctance to voice conservative opinions rather than analysts’ inflation of their true beliefs. We predict that this reluctance allows each firm’s conservative forecast to be heavily influenced by the firm’s past performance and allows the noisy predictors to distinguish high-growth firms from low-growth ones. Consistent with our prediction, we find that each firm’s most conservative forecasts are those most strongly influenced by past performance and have the least predictive power.

Persistence and current determinants of the future earnings growth rates of firms

Consistent with economic intuition, short- and long-term growth rates of both accrual earnings (AE) and cash flows (CF) exhibit mean-reversion at the firm level that is stronger when their base-year counterpart is negative. Firm attributes such as size, firm's age, earnings volatility, and past returns exhibit predictive power for growth rates for individual firms. Short- and long-term IBES earnings growth rate forecasts, when orthogonalized with respect to contemporaneous and past actual earnings growth rates, exhibit predictive power for, respectively, short- and long-term AE (but not CF) growth rates for both positive and negative base-year growth rates.

Analyzing Valuation Measures: A PerformanceHorse Race over the Past 40 Years

In this article, the authors compare the investment performance of portfolios sorted on different valuation measures. They find that EBITDA/TEV has been the best performing metric, historically, and outperforms many investor favorites, such as price-to-earnings ratio, free cash flow to total enterprise value, and book-to-market ratio. The authors also explore the investment potential of long-term valuation ratios, which replace one-year earnings with an average of long-term earnings. They find that in contrast to prior empirical work, long-term ratios add little investment value over standard one-year valuation metrics.

Market implied future earnings and analysts’ forecasts

This study provides evidence on market implied future earnings based on the residual income valuation (RIV) framework and compares these earnings with analyst earnings forecasts for accuracy (absolute forecast error) and bias (signed forecast error). Prior research shows that current stock price reflects future earnings and that analyst forecasts are biased. Thus, how price-based imputed forecasts compare with analyst forecasts is interesting. Using different cost of capital estimates, we use the price-earnings relation and impute firms’ future annual earnings from three residual income (RI) models for up to 5 years. Relative to I/B/E/S analyst forecasts, imputed forecasts from the RI models are less or no more biased when cost of capital is low (equal to a risk-free rate or slightly higher). Analysts slightly outperform these RI models in terms of accuracy for immediate future (1 or 2) years in the forecast horizon but the opposite is true for more distant future years when cost of capital is low. A regression analysis shows that, in explaining future earnings changes, analyst forecasts relative to imputed forecasts do not impound a significant amount of earnings information embedded in current price. In additional tests, we impute future long-term earnings growth rates and find that they are more accurate and less biased than I/B/E/S analyst long-term earnings growth forecasts. Together, the results suggest that the RIV framework can be used to impute a firm’s future earnings that are high in accuracy and low in bias, especially for distant future years.

Anatomy of Aborted Stock Repurchases

The motivation and characteristics of firms that announce stock repurchase programs but do not carry them out are poorly understood. We conjecture that the long-term earnings quality of such firms is low, which makes them poor candidates for subsequent stock purchase. Their announcement is just a bluff, possibly to get a short-term bounce in their stock price. We find evidence of poor long-term earnings quality in these firms in the pre-purchase period with further deterioration in the post-purchase period. A probit model confirms that poor long-term quality of accruals, a proxy for earnings quality, increases the chance of not carrying through on the repurchase announcement. We find a significant relationship between long-term earnings quality and subsequent performance for firms that carry through on their purchase plans but no such evidence for firms that do not.

Analyst Conflicts and Research Quality

This paper examines whether the quality of stock analysts' forecasts is related to conflicts of interest from their employers' investment banking (IB) and brokerage businesses. We consider four aspects of forecast quality: accuracy, bias, and revision frequency of quarterly earnings per share (EPS) forecasts and relative optimism in long-term earnings growth (LTG) forecasts. Using a unique dataset that contains the annual revenue breakdown of analysts' employers among IB, brokerage, and other businesses, we uncover two main findings. First, accuracy and bias in quarterly EPS forecasts appear to be unrelated to conflict magnitudes after controlling for forecast age, firm resources, and analyst characteristics. Second, relative optimism in LTG forecasts and the revision frequency of quarterly EPS forecasts are positively related to the importance of brokerage business to analysts' employers. Additional tests suggest that the frequency of quarterly forecast revisions is positively related to analysts' trade generation incentives. Our findings suggest that reputation concerns keep analysts honest with respect to short-term earnings forecasts but not LTG forecasts. In addition, conflicts from brokerage appear to play a more important role in shaping analysts' forecasting behavior than has been previously recognized.

The Long-Term Earnings Impact of Post-Secondary Education Following Job Loss

In this study, the long-term impact on earnings of attending post-secondary education institutions following job loss is estimated using a large longitudinal administrative database of Canadian workers. A difference-in-difference model is used for this purpose. The results suggest that, over the period spanning five years preceding and nine years following job loss, workers who attended post-secondary education shortly after displacement saw their earnings increase by almost $7,000 more than displaced workers who did not. Significant benefits are found by sex, age, marital status, and union coverage, with the exception of men aged 35 to 44 years. Despite the benefits of education, job displacement is found to be associated with only a modest increase in post-secondary education attendance for all groups examined.

Formal Identification of Sentiment Effects in Asset Markets

It is generally accepted that excessive exuberance or gloom in investor sentiment contributes to booms and crashes in asset prices but, because of its complex interaction with other aspects of the valuation process, these effects are not easy to identify with statistical confidence and this limits the scope for crafting an adequate and early policy response. To fill this gap, we develop an ex ante valuation approach that assigns different measures of sentiment to separate roles in the valuation equation. One measure of sentiment is assigned to capture risk aversion effects, while a broader-based investor sentiment index is assigned to capture changes in the perceived prospects for long-term earnings growth. The ratio of equity valuation when sentiment variables are included in the valuation exercise to the valuation when they are excluded is an obvious indicator of sentiment effects but this is difficult to assess statistically. We show that the ratio of average squared ‘implied’ long-run earnings growth ‘with’ and ‘without’ sentiment produces a sentiment indicator that can be assessed with statistical significance. Out-of-sample testing using the Dow 30 index shows that sentiment effects can often be confidently identified as widespread, significant and large. We find that the growth ratio is more prescient as an early warning indicator of mis-valuations. Being able to draw attention to such statistically verifiable arbitrage opportunities in a timely fashion offers macro-prudential policy makers a more targeted policy response than making alterations to poorly focused policy instruments, such as interest rates.

A re-examination of analysts’ superiority over time-series forecasts of annual earnings

We re-examine the widely held belief that analysts’ earnings per share (EPS) forecasts are superior to random walk (RW) time-series forecasts. We investigate whether analysts’ annual EPS forecasts are superior, and if so, under what conditions. Simple RW EPS forecasts are more accurate than analysts’ forecasts over longer horizons, for smaller or younger firms, and when analysts forecast negative or large changes in EPS. We also compare the accuracy of a third forecast of longer-term earnings based on a naive extrapolation of analysts’ 1-year-ahead forecasts. Surprisingly, this naive extrapolation provides the most accurate estimate of long-term (2- and 3-year-ahead) earnings. These findings recharacterize prior generalizations about the superiority of analysts’ forecasts and suggest that they are incomplete, misleading, or both. Moreover, in certain settings, researchers can rely on forecasts other than these explicit forecasts.

Management Insights

Management Insights

Analyzing Valuation Measures: A Performance Horse-Race Over the Past 40 Years

We compare the investment performance of portfolios sorted on different valuation measures. EBITDA/TEV has historically been the best performing metric and outperforms many investor favorites such as price-to-earnings, free-cash-flow to total enterprise value, and book-to-market. We also explore the investment potential of long-term valuation ratios, which replace one-year earnings with an average of long-term earnings. In contrast to prior empirical work, we find that long-term ratios add little investment value over standard one-year valuation metrics.

Intergenerational Earnings Mobility and Preferences for Redistribution

This paper analyzes the extent to which intergenerational upward and downward mobility in earnings are related to individuals’ preferences for redistribution. A novel survey question from the German Socio-Economic Panel Study—whether the taxes paid by unskilled workers are too high, adequate or too low—are used to elicit attitudes toward redistribution. Intergenerational mobility with regard to long-term earnings is measured using a rich panel data spanning an observation window of 22 years. The results reveal that intergenerational mobility is significantly related to preferences for redistribution. The empirical results yield strong and robust support for Piketty’s (1995) rational-learning theory: individuals who experience upward (downward) intergenerational mobility are less (more) likely to favor redistribution taxation policies.

The Short- and Long-Term Career Effects of Graduating in a Recession

This paper analyzes the magnitude and sources of long-term earnings declines associated with graduating from college during a recession. Using a large longitudinal university-employer-employee dataset, we find that the cost of recessions for new graduates is substantial and unequal. Unlucky graduates suffer persistent earnings declines lasting ten years. They start to work for lower paying employers, and then partly recover through a gradual process of mobility toward better firms. We document that more advantaged graduates suffer less from graduating in recessions because they switch to better firms quickly, while earnings of less advantaged graduates can be permanently affected by cyclical downgrading. (JEL E32, I23, J22, J23, J31)

Do financial analysts' long-term growth forecasts matter? Evidence from stock recommendations and career outcomes

Prior literature portrays long-term growth (LTG) forecasts as nonsensical from a valuation perspective. Instead, we hypothesize that LTG forecasts signal high effort and ability to analyze firms' long-term prospects. We document stronger market response to stock recommendation revisions of analysts who publish accompanying LTG forecasts. We also hypothesize and find that these analysts are less likely to leave the profession or move to smaller brokerage houses. Consistent with Reg. FD's intention to promote fundamental analysis of long-term earnings prospects, post-Reg. FD observations drive our results. Overall, we identify previously undocumented benefits accruing to analysts who publish LTG forecasts.

Do Financial Analysts’ Long-Term Growth Forecasts Matter? Evidence from Stock Recommendations and Career Outcomes

Prior literature refers to economic incentives to generate investment banking business and trading commissions as explanations for analyst publication of forecasts of firms’ long-term earnings growth (LTG). Prior research also documents wildly optimistic LTG forecasts and a negative relation between LTG forecasts and subsequent excess returns. Thus, the literature portrays analysts’ LTG forecasts as nonsensical from a valuation perspective. We introduce and investigate a new perspective on the value-relevance of analyst publication of LTG forecasts. We hypothesize that analysts issuing LTG forecasts signal relatively high effort and ability in developing perspective of the subject firms’ long-term prospects. Consistent with this hypothesis, we find that the stock market responds more strongly to the stock recommendation revisions of analysts who publish accompanying LTG forecasts. In addition, we hypothesize and find that analysts issuing LTG forecasts are less likely to leave the profession or move to smaller brokerage houses. Consistent with Reg. FD’s intention to restrict analyst access to insider information and promote fundamental analysis of the valuation implications of firms’ long-term prospects, we find that post-Reg. FD observations drive most of our results. Overall, we identify previously undocumented benefits accruing to analysts who publish LTG forecasts.

Properties of implied cost of capital using analysts’ forecasts

We evaluate the influence of measurement error in analysts’ forecasts on the accuracy of implied cost of capital estimates from various implementations of the ‘implied cost of capital’ approach, and develop corrections for the measurement error. The implied cost of capital approach relies on analysts’ short- and long-term earnings forecasts as proxies for the market’s expectation of future earnings, and solves for the implied discount rate that equates the present value of the expected future payoffs to the current stock price. We document predictable error in the implied cost of capital estimates resulting from analysts’ forecasts that are sluggish with respect to information in past stock returns. We propose two methods to mitigate the influence of sluggish forecasts on the implied cost of capital estimates. These methods substantially improve the ability of the implied cost of capital estimates to explain cross-sectional variation in future stock returns, which is consistent with the corrections being effective in mitigating the error in the estimates due to analysts’ sluggishness.

Long-term earnings and employment effects of housing voucher receipt

Using a propensity score matching approach coupled with difference-in-differences regression analysis, we estimate the effect of housing voucher receipt on the employment and earnings of a large longitudinal sample of low-income families for 6 years following voucher receipt. Our results indicate that voucher receipt has little effect on employment, but a negative effect on earnings. The negative earnings effect is largest in the years immediately following initial receipt, and fades out over time. In addition, we find that the pattern of recipient earnings responses to voucher receipt differs substantially across demographic subgroups. Several robustness tests are run to support the reliability of our findings. We discuss the implications of our findings for research and policy.

Does earnings acceleration convey information?

Valuation theory, investment managers, financial analysts, and textbooks advocating horizontal financial statement analysis suggest that the change in earnings growth (earnings acceleration) conveys value relevant information. We test this assertion using a large sample of U.S. firms. Results from cross-sectional short-window (around earnings announcements) and long-window (annual) returns-earnings regressions reveal a strong association between contemporaneous returns and earnings acceleration after controlling for earnings levels and changes. Moreover, earnings acceleration is useful in predicting future earnings, and financial analysts appear to use the information in earnings acceleration in addition to earnings levels and changes in revising their forecasts. Furthermore, earnings acceleration conveys information incremental to that provided by changes in analysts’ forecasts of long-term earnings growth. This study extends the empirical returns-earnings model that includes only earnings levels and changes and shows that more useful information can be extracted from reported earnings numbers than has been previously documented.