Life Cycle Models and Forecasting Growth and Profitability

Patrick Vorst, Teri Lombardi Yohn

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

Mean reversion in profitability and growth is a well-documented phenomenon; however, comparatively less is known about the level of analysis that best captures mean reversion. In this study, we find that analyzing firms by life cycle stage improves the out-of-sample accuracy of profitability and growth forecasts over analyzing firms pooled across the economy and analyzing firms by industry. The improved accuracy is robust to both short-term and long-term forecasts of profitability and growth. We also find that the improvement in accuracy of forecasts from life cycle analyses is greatest for firms in the introduction and decline stages and for firms with greater uncertainty. Finally, we examine market participants' use of life cycle information in forming expectations. We find inefficient use of life cycle information in analyst forecasts, but not in management forecasts. We also find that life cycle forecasts are associated with year-ahead abnormal stock returns.

Original languageEnglish
Pages (from-to)357-381
Number of pages25
JournalAccounting Review
Volume93
Issue number6
DOIs
Publication statusPublished - Nov 2018

Keywords

  • forecasting
  • firm life cycle
  • analyst forecasts
  • profitability
  • growth
  • CASH FLOWS
  • STOCK-PRICES
  • MANAGEMENT
  • EARNINGS
  • MARKET
  • INDUSTRY
  • PERSISTENCE
  • ACCRUALS
  • CLASSIFICATION
  • ACQUISITIONS

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