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L3_Earnings_Estimation___Earnings

L3_Earnings_Estimation___Earnings - Earnings Importance and...

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1 Earnings: Importance and Estimation B,K & M Chapter 17
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2 Earnings are Important: Growth Earnings related to superior returns over time Some studies suggest companies with large increases in earnings ( earnings growth ) deliver the most consistent superior returns Specifically, differences between predicted and actual earnings increases have the greatest impact on price changes
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3 Earnings are Important: Expectations According to Efficient Market Theory : expectations of future earnings should be incorporated into share prices therefore excess returns should not be achievable using consensus expectations Studies show that if earnings turn out to be higher than forecasts , an excess return can be achieved Excess returns can be achieved if changes in expectations of future earnings can be predicted Therefore, the objective is to make superior earnings forecasts
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