Investor growth expectations: Analysts vs. history

A study by Cragg and Malkiel (1982) suggests that the stock valuation process embodies analysts' forecasts, rather than historically based growth figures. Based on data for the 1960s, the investigation uses data sets consisting of historically based measures of future growth and the consensus a...

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Bibliographic Details
Published in:Journal of portfolio management 1988-04, Vol.14 (3), p.78-82
Main Authors: Vander Weide, James H, Carleton, Willard T
Format: Article
Language:English
Subjects:
Decision making
Discounted cash flow
Growth
Risk
Securities analysis
Securities trading
Statistical analysis
Stock prices
Studies
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Summary:A study by Cragg and Malkiel (1982) suggests that the stock valuation process embodies analysts' forecasts, rather than historically based growth figures. Based on data for the 1960s, the investigation uses data sets consisting of historically based measures of future growth and the consensus analysts' forecasts of 5-year earning growth supplied by Lynch, Jones & Ryan's Institutional Brokers Estimate System. The study was performed in 2 stages: 1. a correlation analysis to determine which historically oriented growth rate is most highly correlated with year-end price-earnings ratios, and 2. a regression study. Overwhelming evidence indicates that the consensus analysts' forecast of future growth is superior to historically oriented growth measures in predicting the firm's stock price. Some evidence also suggests that investors tend to view risk in traditional terms. This finding indirectly supports the use of valuation models, the input of which includes expected growth rates.
ISSN:0095-4918
2168-8656
DOI:10.3905/jpm.1988.409159