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Title: Sticky Expectations and the Profitability Anomaly

Author(s): Jean-Philippe Bouchaud, Philipp Krueger, Augustin Landier and David Thesmar

Publication Date: December 2017

Keyword(s): profitability anomaly and Sticky expectations

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Bouchaud, J, Krueger, P, Landier, A and Thesmar, D. 2017. 'Sticky Expectations and the Profitability Anomaly'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12528