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Sticky Expectations and the Profitability Anomaly
Author(s) -
BOUCHAUD JEANPHILIPPE,
KRÜGER PHILIPP,
LANDIER AUGUSTIN,
THESMAR DAVID
Publication year - 2019
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12734
Subject(s) - profitability index , anomaly (physics) , profit (economics) , pessimism , econometrics , economics , financial economics , microeconomics , finance , philosophy , physics , epistemology , condensed matter physics
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.