Journal of Accounting and Economics Vol. 25 No. 3 1998

Accounting valuation, market expectation, and cross-sectional stock returns

Richard M. Frankel¹; Charles M. C. Lee^2,3

¹ University of Michigan–Ann Arbor · ² St Petersburg University · ³ Cornell University

Abstract

This study examines the usefulness of an analyst-based valuation model in predicting cross-sectional stock returns. We estimate firms' fundamental values (V) using I/B/E/S consensus forecasts and a residual income model. We find that V is highly correlated with contemporaneous stock price, and that the V/P ratio is a good predictor of long-term cross-sectional returns. This effect is not explained by a firm's market beta, B/P ratio, or total market capitalization. In addition, we find errors in consensus analyst earnings forecasts are predictable, and that the predictive power of V/P can be improved by incorporating these errors.

DOI

10.1016/s0165-4101(98)00026-3

Volume

25

Issue

3

Pages

283-319

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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