Hostname: page-component-f554764f5-rj9fg Total loading time: 0 Render date: 2025-04-21T06:39:02.374Z Has data issue: false hasContentIssue false
  • English
  • Français

Valuation and Long-Term Growth Expectations

Published online by Cambridge University Press:  07 April 2025

Angel Tengulov Open the ORCID record for Angel Tengulov [Opens in a new window] ,
Josef Zechner Open the ORCID record for Josef Zechner [Opens in a new window]  and
Jeffrey Zwiebel
Angel Tengulov*
Affiliation:
University of Kansas, School of Business
Josef Zechner
Affiliation:
Vienna University of Economics and Business, Department of Finance, Accounting, and Statistics [email protected]
Jeffrey Zwiebel
Affiliation:
Stanford University, Graduate School of Business [email protected]
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Long-term growth expectations are central to investment analysis and corporate valuation. Despite a dominant effect on firm value, the academic literature and practitioner conventions provide little guidance on determining this long-term growth rate. This article takes a step in addressing this gap: we estimate the relationship between long-term growth and an extensive selection of firm, industry, and market characteristics. Market prices do not seem to fully capture long-term growth information. Cross sectional tests yield substantial positive abnormal returns for firms with high expected long-term growth.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 38
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2025. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Matthias Molnar, Haviland Sheldahl-Thomason, and Xuan Su for their excellent research assistance. The article greatly benefited from the valuable suggestions of two anonymous referees and Mara Faccio (the editor), as well as Anne Anderson (discussant), Nick Bollen, Gjergji Cici, Alois Geyer, Mohammad Ghaderi, Ted Juhl, Christian Laux, Craig Lewis, J Li (discussant), Shaobo Li, Neal Stoughton, Avanidhar Subrahmanyam, Mihail Velikov, Bob Whaley, and the participants at the Financial Management Association USA conference, Northern Finance Association conference, Silicon Prairie Finance conference, Johns Hopkins University, University of St. Gallen, Spängler IQAM, University of Maryland, Vanderbilt, and the Vienna Graduate School of Finance (VGSF) for helpful comments and discussions. Any remaining errors are our own.

References

Admati, A. R.; Pfleiderer, P.; and Zechner, J.. “Large Shareholder Activism, Risk Sharing, and Financial Market Equilibrium.” Journal of Political Economy, 102 (1994), 1097–130.CrossRefGoogle Scholar
Ahrens, A., Hansen, C. B., and Schaffer, M. E.. “Lassopack: Model Selection and Prediction with Regularized Regression in Stata.” Stata Journal, 20 (2020), 176–235.CrossRefGoogle Scholar
Allee, K. D.; Erickson, D.; Esplin, A. M.; and Yohn, T. L.. “The Characteristics, Valuation Methods, and Information Use of Valuation Specialists.” Accounting Horizons, 34 (2020), 23–38.CrossRefGoogle Scholar
Alti, A., and Tetlock, P. C.. “Biased Beliefs, Asset Prices, and Investment: A Structural Approach.” Journal of Finance, 69 (2014), 325–361.Google Scholar
Andrews, D. W. “Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation.” Econometrica, 59 (1991), 817.Google Scholar
Ang, A.; Liu, J.; and Schwarz, K.. “Using Stocks or Portfolios in Tests of Factor Models.” Journal of Financial and Quantitative Analysis, 55 (2020), 709–50.CrossRefGoogle Scholar
Arrow, K. J. The Limits of Organization. New York, NY: W. W. Norton & Company (1974).Google Scholar
Bain, J. S. Barriers to New Competition: Their Character and Consequences in Manufacturing Industries, Vol. 329. Cambridge, MA: Harvard University Press (1956).Google Scholar
Ball, R.; Gerakos, J.; Linnainmaa, J. T.; and Nikolaev, V.. “Deflating Profitability.” Journal of Financial Economics, 117 (2015), 225–248.CrossRefGoogle Scholar
Ball, R.; Gerakos, J.; Linnainmaa, J. T.; and Nikolaev, V.. “Accruals, Cash Flows, and Operating Profitability in the Cross Section of Stock Returns.” Journal of Financial Economics, 121 (2016), 28–45.CrossRefGoogle Scholar
Bansal, R.; Miller, S.; Song, D.; and Yaron, A.. “The Term Structure of Equity Risk Premia.” Journal of Financial Economics, 142 (2021), 1209–1228.Google Scholar
Barberis, N. “Psychology-Based Models of Asset Prices and Trading Volume.” In Handbook of Behavioral Economics: Applications and Foundations 1, Vol. 1. Amsterdam, Netherlands: Elsevier (2018), 79–175.Google Scholar
Barberis, N.; Shleifer, A.; and Vishny, R.. “A Model of Investor Sentiment.” Journal of Financial Economics, 49 (1998), 307–43.Google Scholar
Berle, A., and Means, G.. Modern Corporation and Private Property. New Brunswick, NJ: Transaction Publishers (1932), 273–289.Google Scholar
Bernanke, B. S. “Bankruptcy, Liquidity, and Recession.” American Economic Review, 71 (1981), 155–159.Google Scholar
Birch, D. G. Job Creation in America: How our Smallest Companies Put the Most People to Work. New York, NY: Free Press (1987), 1–244.Google Scholar
Bloom, N., and Van Reenen, J.. “Patents, Real Options and Firm Performance.” Economic Journal, 112 (2002), C97–C116.CrossRefGoogle Scholar
Bordalo, P.; Gennaioli, N.; La Porta, R.; and Shleifer, A.. “Diagnostic Expectations and Stock Returns.” Journal of Finance, 74 (2019), 2839–2874.Google Scholar
Bordalo, P.; Gennaioli, N.; Ma, Y.; and Shleifer, A.. “Overreaction in Macroeconomic Expectations.” American Economic Review, 110 (2020), 2748–2782.CrossRefGoogle Scholar
Campbell, J. Y.; Hilscher, J.; and Szilagyi, J.. “In Search of Distress Risk.” Journal of Finance, 63 (2008), 2899–2939.Google Scholar
Campbell, J. Y.; Polk, C.; and Vuolteenaho, T.. “Growth or Glamour? Fundamentals and Systematic Risk in Stock Returns.” Review of Financial Studies, 23 (2010), 305–44.CrossRefGoogle Scholar
Campbell, J. Y., and Thompson, S. B.. “Predicting Excess Stock Returns out of Sample: Can Anything Beat the Historical Average?” Review of Financial Studies, 21 (2008), 1509–1531.CrossRefGoogle Scholar
Carlson, M.; Fisher, A.; and Giammarino, R.. “Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long-Run Performance.” Journal of Finance, 61 (2006), 1009–1034.CrossRefGoogle Scholar
Chan, L. K.; Karceski, J.; and Lakonishok, J.. “The Level and Persistence of Growth Rates.” Journal of Finance, 58 (2003), 643–684.Google Scholar
Chen, J., and Chen, Z.. “Extended Bayesian Information Criteria for Model Selection with Large Model Spaces.” Biometrika, 95 (2008), 759–771.CrossRefGoogle Scholar
Cheng, Q. “What Determines Residual Income?” Accounting Review, 80 (2005), 85–112.Google Scholar
Choi, J. J., and Mertens, T. M.. “Extrapolative Expectations and the Equity Premium.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3462056 (2019).CrossRefGoogle Scholar
Clark, T. E., and West, K. D.. “Using Out-of-Sample Mean Squared Prediction Errors to Test the Martingale Difference Hypothesis.” Journal of Econometrics, 135 (2006), 155–186.Google Scholar
Cox, D. R., and Snell, E. J.. “The Choice of Variables in Observational Studies.” Journal of the Royal Statistical Society: Series C (Applied Statistics), 23 (1974), 51–59.Google Scholar
Daniel, K., and Titman, S.. “Market Reactions to Tangible and Intangible Information.” Journal of Finance, 61 (2006), 1605–1643.CrossRefGoogle Scholar
Dechow, P. M., and Sloan, R. G.. “Returns to Contrarian Investment Strategies: Tests of Naive Expectations Hypotheses.” Journal of Financial Economics, 43 (1997), 3–27.CrossRefGoogle Scholar
Demiroglu, C., and James, C. M.. “The Role of Private Equity Group Reputation in LBO Financing.” Journal of Financial Economics, 96 (2010), 306–330.CrossRefGoogle Scholar
Dixit, A., and Norman, V. D.. “Advertising and Welfare: Reply.” Bell Journal of Economics, 10 (1979), 728–729.CrossRefGoogle Scholar
Eaton, G. W.; Guo, F.; Liu, T.; and Officer, M. S.. “Peer Selection and Valuation in Mergers and Acquisitions.” Journal of Financial Economics, 146 (2021), 230–255.Google Scholar
Engelberg, J.; McLean, R. D.; Pontiff, J.; and Ringgenberg, M. C.. “Do Cross-Sectional Predictors Contain Systematic Information?” Journal of Financial and Quantitative Analysis, 58 (2023), 1172–1201.CrossRefGoogle Scholar
Evans, D. S. “The Relationship Between Firm Growth, Size, and Age: Estimates for 100 Manufacturing Industries.” Journal of Industrial Economics 35 (1987), 567–581.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Forecasting Profitability and Earnings.” Journal of Business, 73 (2000), 161–175.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Profitability, Investment and Average Returns.” Journal of Financial Economics, 82 (2006), 491–518.Google Scholar
Fama, E. F., and French, K. R.. “Dissecting Anomalies.” Journal of Finance, 63 (2008), 1653–1678.Google Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.CrossRefGoogle Scholar
Fischer, E. O.; Heinkel, R.; and Zechner, J.. “Dynamic Capital Structure Choice: Theory and Tests.” Journal of Finance, 44 (1989), 19–40.Google Scholar
Fisher, I. The Rate of Interest: Its Nature, Determination and Relation to Economic Phenomena. New York, NY: Macmillan (1907).Google Scholar
Friedman, J.; Hastie, T.; and Tibshirani, R.. “Regularization Paths for Generalized Linear Models Via Coordinate Descent.” Journal of Statistical Software, 33 (2010), 1.CrossRefGoogle ScholarPubMed
Fuster, A.; Laibson, D.; and Mendel, B.. “Natural Expectations and Macroeconomic Fluctuations.” Journal of Economic Perspectives, 24 (2010), 67–84.CrossRefGoogle ScholarPubMed
Gao, Z., and Wu, W.-T.. “Predicting Long-Term Earnings Growth from Multiple Information Sources.” International Review of Financial Analysis, 32 (2014), 71–84.Google Scholar
Giglio, S.; Kelly, B. T.; and Kozak, S.. “Equity Term Structures Without Dividend Strips Data.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3533486 (2021).CrossRefGoogle Scholar
Gillan, S. L. “Recent Developments in Corporate Governance: An Overview.” Journal of Corporate Finance, 12 (2006), 381–402.Google Scholar
Goldstein, R.; Ju, N.; and Leland, H.. “An EBIT-Based Model of Dynamic Capital Structure.” Journal of Business, 74 (2001), 483–512.Google Scholar
Gordon, M. J. “Dividends, Earnings, and Stock Prices.” Review of Economics and Statistics, 41 (1959), 99–105.Google Scholar
Gormsen, N. J.; Koijen, R. S.; and Martin, I.. “Implied Dividend Volatility and Expected Growth.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3753691 (2020).Google Scholar
Graham, J. R., and Leary, M. T.. “A Review of Empirical Capital Structure Research and Directions for the Future.” Annual Review of Financial Economics, 3 (2011), 309–345.Google Scholar
Grossman, S. J., and Hart, O. D.. “Corporate Financial Structure and Managerial Incentives.” In The Economics of Information and Uncertainty, McCall, J. J., ed. Chicago, IL: University of Chicago Press (1982), 107–140.Google Scholar
Grossman, S. J., and Hart, O. D.. “One Share-One Vote and the Market for Corporate Control.” Journal of Financial Economics, 20 (1988), 175–202.CrossRefGoogle Scholar
Harris, M., and Raviv, A.. “Corporate Governance: Voting Rights and Majority Rules.” Journal of Financial Economics, 20 (1988), 203–235.Google Scholar
Hartzell, J. C., and Starks, L. T.. “Institutional Investors and Executive Compensation.” Journal of Finance, 58 (2003), 2351–2374.Google Scholar
Harvey, C. R.; Liu, Y.; and Zhu, H.. “… and the Cross-Section of Expected Returns.” Review of Financial Studies, 29 (2016), 5–68.Google Scholar
Hirshleifer, D.; Li, J.; and Yu, J.. “Asset Pricing in Production Economies with Extrapolative Expectations.” Journal of Monetary Economics, 76 (2015), 87–106.Google Scholar
Holmstrom, B. “Agency Costs and Innovation.” Journal of Economic Behavior & Organization, 12 (1989), 305–327.CrossRefGoogle Scholar
Hotelling, H. “Stability in Competition.” Economic Journal, 39 (1929), 41–57.Google Scholar
Hou, K.; Xue, C.; and Zhang, L.. “Replicating Anomalies.” Review of Financial Studies, 33 (2020), 2019–2133.CrossRefGoogle Scholar
Huang, D.; Zhang, H.; Zhou, G.; and Zhu, Y.. “Fundamental Extrapolation and Stock Returns.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3678363 (2023), 1–59.Google Scholar
Jensen, M. C. “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review, 76 (1986), 323–329.Google Scholar
Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Jylha, P., and Ungeheuer, M.. “Growth Expectations out of WACC.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3618612 (2021), 1–60.Google Scholar
Kaplan, S. N., and Ruback, R. S.. “The Valuation of Cash Flow Forecasts: An Empirical Analysis.” Journal of Finance, 50 (1995), 1059–1093.CrossRefGoogle Scholar
Kogan, L.; Papanikolaou, D.; Seru, A.; and Stoffman, N.. “Technological Innovation, Resource Allocation, and Growth.” Quarterly Journal of Economics, 132 (2017), 665–712.Google Scholar
Kozak, S.; Nagel, S.; and Santosh, S.. “Interpreting Factor Models.” Journal of Finance, 73 (2018), 1183–1223.CrossRefGoogle Scholar
Kryzanowski, L., and Mohsni, S.. “Growth of Aggregate Corporate Earnings and Cash-Flows: Persistence and Determinants.” International Review of Economics & Finance, 25 (2013), 13–23.Google Scholar
Kryzanowski, L., and Mohsni, S.. “Persistence and Current Determinants of the Future Earnings Growth Rates of Firms.” European Journal of Finance, 20 (2014), 181–200. https://doi.org/10.1080/1351847X.2013.769891.Google Scholar
Lakonishok, J.; Shleifer, A.; and Vishny, R. W.. “Contrarian Investment, Extrapolation, and Risk.” Journal of Finance, 49 (1994), 1541–1578.CrossRefGoogle Scholar
Liu, J.; Nissim, D.; and Thomas, J.. “Equity Valuation Using Multiples.” Journal of Accounting Research, 40 (2002), 135–172.Google Scholar
Loderer, C.; Stulz, R.; and Waelchli, U.. “Firm Rigidities and the Decline in Growth Opportunities.” Management Science, 63 (2016), 3000–3020.CrossRefGoogle Scholar
Luttmer, E. G. “Models of Growth and Firm Heterogeneity.” Annual Review of Economics, 2 (2010), 547–576.Google Scholar
Manso, G. “Motivating Innovation.” Journal of Finance, 66 (2011), 1823–1860.CrossRefGoogle Scholar
Mantel, N. “Why Stepdown Procedures in Variable Selection.” Technometrics, 12 (1970), 621–625.Google Scholar
Moscarini, G., and Postel-Vinay, F.. “The Contribution of Large and Small Employers to Job Creation in Times of High and Low Unemployment.” American Economic Review, 102 (2012), 2509–2539.CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Novy-Marx, R. “The Other Side of Value: The Gross Profitability Premium.” Journal of Financial Economics, 108 (2013), 1–28.CrossRefGoogle Scholar
Novy-Marx, R., and Velikov, M.. “A Taxonomy of Anomalies and their Trading Costs.” Review of Financial Studies, 29 (2015), 104–147.CrossRefGoogle Scholar
Penman, S. H. “An Evaluation of Accounting Rate-of-Return.” Journal of Accounting, Auditing & Finance, 6 (1991), 233–255.Google Scholar
Petersen, M. A. “Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435–480.Google Scholar
Purnanandam, A. K., and Swaminathan, B.. “Are IPOs Really Underpriced?” Review of Financial Studies, 17 (2004), 811–848.CrossRefGoogle Scholar
Salop, S. C. “Monopolistic Competition with Outside Goods.” Bell Journal of Economics, 141 (1979), 141–145.CrossRefGoogle Scholar
Schwarz, G. “Estimating the Dimension of a Model.” Annals of Statistics, 6 (1978), 461–464.CrossRefGoogle Scholar
Sharpe, S. A. “Reexamining Stock Valuation and Inflation: The Implications of Analysts’ Earnings Forecasts.” Review of Economics and Statistics, 84 (2002), 632–648.Google Scholar
Shleifer, A., and Vishny, R. W.. “Large Shareholders and Corporate Control.” Journal of Political Economy, 94 (1986), 461–488.Google Scholar
Shleifer, A., and Vishny, R. W.. “A Survey of Corporate Governance.” Journal of Finance, 52 (1997), 737–783.CrossRefGoogle Scholar
Stigler, G. J. The Organization of Industry. Chicago, IL: University of Chicago Press Economics Books (1983).Google Scholar
Tibshirani, R. “Regression Shrinkage and Selection Via the Lasso.” Journal of the Royal Statistical Society: Series B (Methodological), 58 (1996), 267–288.CrossRefGoogle Scholar
Van Binsbergen, J.; Brandt, M.; and Koijen, R.. “On the Timing and Pricing of Dividends.” American Economic Review, 102 (2012), 1596–618.Google Scholar
Van Binsbergen, J.; Hueskes, W.; Koijen, R.; and Vrugt, E.. “Equity Yields.” Journal of Financial Economics, 110 (2013), 503–519.CrossRefGoogle Scholar
Van Binsbergen, J. H., and Koijen, R. S.. “The Term Structure of Returns: Facts and Theory.” Journal of Financial Economics, 124 (2017), 1–21.CrossRefGoogle Scholar
Von Böhm-Bawerk, E. Positive Theorie Des Kapitales, Vol. 2. Innsbruck, Austria: Wagner’sche Universitäts-Buchhandlung (1899).Google Scholar
Wahal, S. “The Profitability and Investment Premium: Pre-1963 Evidence.” Journal of Financial Economics, 131 (2019), 362–77.Google Scholar
Wang, B. “The Cash Conversion Cycle Spread.” Journal of Financial Economics, 133 (2019), 472–497.CrossRefGoogle Scholar
Supplementary material: File

Tengulov et al. supplementary material

Tengulov et al. supplementary material
Download Tengulov et al. supplementary material(File)
File 408.6 KB