Abstract: The longterm growth forecasts of equity analysts do not have
welldefined horizons, an ambiguity of substantial import for many
applications. I propose an empirical valuation model, derived from
the CampbellShiller dividendprice ratio model, in which the forecast
horizon used by the "market" can be deduced from linear regressions.
Specifically, in this model, the horizon can be inferred from the
elasticity of the priceearnings ratio with respect to the longterm
growth forecast. The model is estimated on industry and sectorlevel
portfolios of S&P 500 firms over 19832001. The estimated
coefficients on consensus longterm growth forecasts suggest that the
market applies these forecasts to an average horizon of at least 6
years, and as many as 10 years.
Keywords: Stock returns, equity premium, priceearnings ratio, earnings growth
Full paper (238 KB PDF)
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Last update: August 19, 2004
