1. Earnings Expectations in the COVID Crisis
- Author
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Augustin Landier, David Thesmar, Toulouse School of Economics (TSE), École des hautes études en sciences sociales (EHESS)-Institut National de la Recherche Agronomique (INRA)-Centre National de la Recherche Scientifique (CNRS)-Université Toulouse 1 Capitole (UT1), Université Fédérale Toulouse Midi-Pyrénées-Université Fédérale Toulouse Midi-Pyrénées, Groupement de Recherche et d'Etudes en Gestion à HEC (GREGH), Ecole des Hautes Etudes Commerciales (HEC Paris)-Centre National de la Recherche Scientifique (CNRS), and HEC Paris Research Paper Series
- Subjects
JEL: G - Financial Economics/G.G3 - Corporate Finance and Governance/G.G3.G30 - General ,050208 finance ,JEL: G - Financial Economics/G.G1 - General Financial Markets/G.G1.G10 - General ,8. Economic growth ,0502 economics and business ,05 social sciences ,Analyst Forecasts ,[SHS.GESTION]Humanities and Social Sciences/Business administration ,050207 economics ,Valuation ,Discount rate - Abstract
We analyze firm-level analyst forecasts during the COVID crisis. First, we describe expectations dynamics about future corporate earnings. Downward revisions have been sharp, mostly focused on 2020, 2021 and 2022, but much less drastic than the lower bound estimated by Gormsen and Koijen (2020). Analyst forecasts do not exhibit evidence of over-reaction: As of mid-May, forecasts over 2020 earnings have progressively been reduced by 16%. Longer-run forecasts, as well as expected “Long-Term Growth” have reacted much less than short-run forecasts, and feature less disagreement. Second, we ask how much discount rate changes explain market dynamics, in an exercise similar to Shiller (1981). Given forecast revisions and price movements, we estimate an implicit discount rate going from 10% in mid-February, to 13% at the end of March, back down to their initial level in mid-May. We then decompose discount rate changes into three factors: changes in unlevered asset risk premium (0%), increased leverage (+1%) and interest rate reduction (-1%). Overall, analyst forecast revisions explain most of the decrease in equity values between January 2020 and mid May 2020, but they do not explain shorter term stock market movements.
- Published
- 2020