The role of expectations in explaining the cross-section of stock returns

We find highly significant results when the cross-section of market-adjusted stock returns is regressed against changes in analyst expectations this year about: (1) this year's earnings, (2) next year's earnings, (3) long-term earnings growth, and (4) noise (measured as the standard deviation of analyst forecasts). Surprisingly, changes in expectations about this year's earnings are not significant in a multiple regression with the other independent variables. Changes in expectations about next year's earnings are highly significant but with an impact that is much smaller than that of changes in expectations about the long-term growth in earnings. Changes in noise are also statistically significant and are negatively related to market-adjusted returns, an indication that the signal to noise ratio, rather than merely the signal, is what drives price adjustments to new information.