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Volume 33 Number 1 June 2008 |
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Persistence in Growth Versus Market Expectations |
| Jason Hall and Matthew Tochterman
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Abstract |
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We measure the persistence and predictability of sales and earnings growth for Australian-listed firms from 1989 to 2006. In contrast to results from the United States, there is evidence of persistence in growth. There is close to a two-thirds chance that a firm reporting growth above the industry median in one year repeats this performance in the following year. However, there is little evidence that valuation ratios -- measured as revenue, earnings or book value of equity relative to market capitalisation -- are particularly useful in predicting future growth. Instead, they reflect recent historical growth, especially in the case of the book-to-market ratio. Firms with low book-to-market ratios have relatively high growth over the previous five years, but their growth over the subsequent five years is almost indistinguishable from firms with high book-to-market ratios. The results are consistent with the hypothesis that value stocks outperform growth stocks because investors overstate firms' ability to consistently make high-growth investments.
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Keywords |
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GROWTH; EARNINGS; VALUATION.
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Contact DetailsJason Hall, Matthew TochtermanUQ Business School, The University of Queensland, St Lucia, QLD 4072 Email: j.hall@business.uq.edu.au |
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