Sticky Expectations and the Profitability Anomaly

By Jean-Philippe Bouchaud, Philipp Krueger, A. Landier, David Thesmar. Journal of Finance, 2018

167 citations recorded by the source corpus.

We propose a theory of the “profitability” anomaly. In our model, investors forecast future profits using a signal and sticky belief dynamics. In this model, past profits forecast future returns (the profitability anomaly). Using analyst forecast data, we measure expectation stickiness at the firm level and find strong support for three additional model predictions: (1) analysts are on average too pessimistic regarding the future profits of high‐profit firms, (2) the profitability anomaly is stronger for stocks that are followed by stickier analysts, and (3) the profitability anomaly is stronger for stocks with more persistent profits.

Subfields: Accounting, Finance, Management Science and Operations Research

View Paper: https://www.semanticscholar.org/paper/67d9816db70939dd215865770e9c131acba19e78

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Citations in the corpus

Diagnostic Expectations and Stock Returns (2019, methodology): “15 Bouchaud et al. (2018) find under-reaction of forecasts for the level of eps over 1 or 2 year horizons.”
The Sustainability Footprint of Institutional Investors (2018, unknown): “Page 27 Bouchaud et al. (2018) or Novy-Marx (2013)) tend to generally have better footprints: the coefficient estimate on Beta_qmrw is positive and significant.”
Psychology-based Models of Asset Prices and Trading Volume (2018, methodology): “Bouchaud et al. (2018) show analytically that their model can explain the profitability anomaly described in Section 2.2 – the fact that, in the cross-section, a firm’s profitability predicts the firm’s subsequent stock return with a positive sign.”