Sticky Expectations and the Profitability Anomaly

46 Pages Posted: 2 Jan 2018

See all articles by Jean-Philippe Bouchaud

Jean-Philippe Bouchaud

Capital Fund Management

Philipp Krueger

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; European Corporate Governance Institute (ECGI); University of Geneva - Geneva School of Economics and Management

Augustin Landier

HEC

David Thesmar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2017

Abstract

We propose a theory of one of the most economically significant stock market anomalies, i.e. 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 predictions of the model: (1) analysts are on average too pessimistic regarding the future profits of high profit firms, (2) the profitability anomaly is stronger for stocks which are followed by stickier analysts, and (3) it is also stronger for stocks with more persistent profits.

Keywords: profitability anomaly, Sticky expectations

Suggested Citation

Bouchaud, Jean-Philippe and Krueger, Philipp and Landier, Augustin and Thesmar, David, Sticky Expectations and the Profitability Anomaly (December 2017). CEPR Discussion Paper No. DP12528, Available at SSRN: https://ssrn.com/abstract=3095578

Jean-Philippe Bouchaud (Contact Author)

Capital Fund Management ( email )

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Philipp Krueger

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

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Swiss Finance Institute ( email )

Switzerland

European Corporate Governance Institute (ECGI) ( email )

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University of Geneva - Geneva School of Economics and Management ( email )

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Augustin Landier

HEC ( email )

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David Thesmar

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

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