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The Role of Expectations in Explaining the Cross-Section of Stock Returns

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Abstract

We find highly significant results when the cross-section of market-adjusted stock returns is regressed against changes in analyst expectations this year about: (1) this year's earnings, (2) next year's earnings, (3) long-term earnings growth, and (4) noise (measured as the standard deviation of analyst forecasts). Surprisingly, changes in expectations about this year's earnings are not significant in a multiple regression with the other independent variables. Changes in expectations about next year's earnings are highly significant but with an impact that is much smaller than that of changes in expectations about the long-term growth in earnings. Changes in noise are also statistically significant and are negatively related to market-adjusted returns, an indication that the signal to noise ratio, rather than merely the signal, is what drives price adjustments to new information.

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Author information

Authors and Affiliations

  1. Monitor Corporate Finance, Monitor Group and Harvard Business School, USA

    Tom Copeland

  2. Charles River Associates, USA

    Aaron Dolgoff

  3. Monitor Corporate Finance, Monitor Group and, Hong Kong University of Science and Technology, Hong Kong

    Alberto Moel

Authors
  1. Tom Copeland
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  2. Aaron Dolgoff
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  3. Alberto Moel
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Correspondence to Tom Copeland.

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Copeland, T., Dolgoff, A. & Moel, A. The Role of Expectations in Explaining the Cross-Section of Stock Returns. Review of Accounting Studies 9, 149–188 (2004). https://doi.org/10.1023/B:RAST.0000028184.06279.57

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  • DOI: https://doi.org/10.1023/B:RAST.0000028184.06279.57

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