Defense Date


Document Type


Degree Name

Doctor of Philosophy



First Advisor

Dr. Benson Wier

Second Advisor

Dr. David Dubofsky


The objectives of this thesis are threefold. First, this dissertation examines whether patterns (growth and consistency in growth) of firms' past financial performance influence investors' perceptions about stock values and future performance of these firms. Second, multiple estimation horizons of past performance variables (ranging from one to five years) are used to assess whether the interaction between growth patterns and measurement interval lengths of these variables influence investor expectations. Third, this thesis examines whether an intermediate price drifts (e.g. Jegadeesh and Titman [1993]) and subsequent long-horizon price reversal (e.g. DeBondt and Thaler (1985)] are manifestations of a market over-reaction as suggested in recent studies (e.g. Lee and Swaminathail [2000]).Annual data on sales, earnings, cash flow, and stock returns over various time periods from a sample of publicly traded firms listed on the NYSE, AMEX, and NASDAQ exchanges from 1983 to 1999 are used to address the research questions proposed in this thesis. The evidence provided in this study shows that low-growth firms outperform their high-growth firm counterparts across different performance variables, estimation intervals, and investment horizons except in the first post-formation year for firms ranked by their prior one-year financial growth rate (except for sales growth). These return differentials between low and high growth firms increase uniformly as more years of past financial performance added.Furthermore, when ranking firms based on the consistency of their prior financial growth rates over multiple estimation periods, this study finds that a firm consistently achieving low (high) growth rates that places it in the lowest (highest) growth 40 percent earns high (low) stock returns. The consistency in a firm's prior financial performance influences the behavior of its future stock returns, i.e. the longer the consistency of exceptionally strong (weak) performance of a firm, the greater (lower) its subsequent stock returns. However, the incremental impact of an additional year of growth consistency on future returns seems to dissipate after the third year of prior performance data, suggesting that it may not take investors longer than three years to assume that a firm's past growth will continue for many years to come. Thus, additional evidence confirming investors' prior beliefs will not lead to a significant price drift because their expectations are already reflected in market prices.First year returns for firms except SG exhibit a strong financial drift. The price drift seems to persist even with longer estimation horizons. Multiple regression analyses suggest that reported higher returns for low-growth firms is not due to risk as measured by market betas or book-to-market ratios, nor is it due to the disproportionate impact caused by relatively smaller firms. As well, the one-year-ahead size-adjusted abnormal returns are significantly and negatively related to the size-adjusted abnormal returns for years 2 through 5. This result indicates that the evidence of a price drift reported in the first post-formation year might be due to a market over-reaction, a finding consistent with results reported by Lee and Swaminathan (2000). In additional analysis, return performance for all growth portfolios for the month of January is compared to the remainder of the year. No evidence indicating that returns to these portfolios are driven by extraordinary performance of low-growth firms in the month of January.For all variables (except for past sales growth and to some degree past stock returns), the financial drift in year one return for portfolios based on prior-one year of past performance data, is significantly stronger than that reported in Chan et al. (2004). Results reported in this thesis indicate that the average abnormal return differential between low and high growth firms for the five-year estimation intervals (with exception of past sales growth) is greater than 10 percentage points. The evidence contradicts that documented in Chan et al. (2004). They find no discernable evidence of price reversals over the next 36-months after ranking firms by their five-year growth rates in sales, operating income, and net income. However, results of this study are consistent with the predictions of behavioral models (e.g. Daniel et al. [I998] and Lakonishok et al. [1994]) suggesting that investors put excessive weight on patterns of a firm's past financial performance when projecting its future prospects.


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Is Part Of

VCU University Archives

Is Part Of

VCU Theses and Dissertations

Date of Submission

June 2008

Included in

Accounting Commons