lecture_earnings_persistence_521_2011

lecture_earnings_persistence_521_2011 - Earnings...

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1 Earnings Persistence Based on research by Louis Chan, Jason Karceski & Josef Lakonishok published in Journal of Finance (2003)
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2 Earnings Persistence Using simple discounted dividend formula, stock price will depend on both the discount rate and growth rate of earnings. Thus, there is an expected growth rate implicit in a stock’s valuation. In particular, we know our assumption about “g” really drives valuation of young companies. Are expected growth rates of earnings realistic? Should we be wary of high-growth companies?
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3 Three key questions 1. What is the distribution of long-term growth rates? 2. Is there persistence in operating performance of a firm? 3. Can good performers be identified ex ante?
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4 Research Setup (wish I had thought of this!) Let’s look at all domestic firms listed on the NYSE, AMEX and NASDAQ 1951-1998. What does the distribution of growth in sales and operating income before extraordinary items (earnings) look like? For each ten (five) year interval, calculate the distribution of growth rates across firms.
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5 Distribution of annualized growth rate over 10 years 10 th % 25 th % 50 th % 75 th % 90 th % Sales 0.1 5.5 10.2 13.8 18.0 Earnings -3.1 3.9 9.7 14.7 20.4
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