Long-Term Growth Forecasts and Stock Recommendation Profitability

We investigate whether analysts’ long-term growth (LTG) forecasts are a signal of analyst effort, which is reflected in the long-term profitability of their stock recommendations. We develop a one-year-ahead LTG forecast likelihood score and execute a trading strategy that generates average abnormal returns of 2.9% per annum over our sample period (1995-2005). Furthermore, in out-of-sample testing during the 2006-2011 period our trading strategy, without portfolio rebalancing, earns abnormal returns of 2.5% per annum. In summary, this study illustrates previously undocumented long-term benefits accruing to investors from the information inherent in analyst LTG forecasts