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.
Journal of Accounting and Economics – Elsevier
Published: Jun 30, 1998
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