Asset Growth and Analysts' Multi-period Earnings Forecasts Articles uri icon


  • Hwang, Lee-Seok

publication date

  • April 2018

start page

  • 89

end page

  • 127


  • 2


  • 43

International Standard Serial Number (ISSN)

  • 2508-7193


  • Using analysts' multi-period earnings forecasts, we examine whether analyst forecast errors are related to asset growth. We find that analyst forecasts are more optimistic for firms with high asset growth, particularly for longer-term forecasts (e.g., two- and three-year-ahead earnings forecasts than one-year-ahead earnings forecasts). Analysts' optimism for high-growth firms is greater for (1) firms that have maintained similar levels of growth in recent periods, (2) firms with higher information uncertainty, and (3) forecasts with longer forecast horizons (e.g., forecasts issued far before fiscal year end). We then examine to what extent analysts' optimism for high-growth firms explains the asset growth effect (i.e., a negative association between asset growth and subsequent stock returns). Adding forecast errors to a growth-return regression substantially reduces the coefficient on asset growth, suggesting an important role of forecast errors in the asset growth effect. Path analysis suggests that analysts' long-term forecast errors, but not short-term forecast errors, are important mediators through which biased expectations about asset growth are incorporated into stock returns. Overall, our findings are consistent with the extrapolation bias explanation for the asset growth effect.