The Earnings Term Structure of Analyst Forecasts and Return Anomalies∗

We construct term structures for expected earnings growth by indexing analyst forecasts according to their maturity. Growth stocks, large stocks, and past losers have relatively steep convex earnings term structures in comparison to value stocks, small stocks, and past winners respectively. These initial earnings term structures overestimate (underestimate) the expected earnings growth of growth stocks, large stocks, and past losers (value stocks, small stocks, and past winners) in the future. However, the market appears to account for these systematic biases in expected earnings growth when pricing assets since cross-sectional variation across the earnings term structures cannot produce abnormal trading profits. Instead, cashflow betas derived from earnings term structures are higher for value stocks, small stocks, and past winners than growth stocks, large stocks, and past losers respectively. These differences in cashflow sensitivity are consistent with risk-based explanations for the size and value premium as well as momentum. ∗We thank Michael Brennan, Phil Dybvig, Bing Han, David Hirshliefer, Inmoo Lee, Steve Orpurt, Mungo Wilson, and Tracey Zhang for their helpful comments and suggestions. †University of Notre Dame, 239 Mendoza College of Business, Notre Dame, IN., 46556, USA. Email: [email protected] ‡Singapore Management University, L.K.C. School of Business, 50 Stamford Road, 178899, Singapore. Email: [email protected]