Growth of aggregate corporate earnings and cash-flows: Persistence and determinants Lawrence Kryzanowski a, ⁎, Sana Mohsni b,1 a University Research Chair in Finance, Department of Finance, John Molson School of Business, Concordia University, 1455 de Maisonneuve Blvd. West, Montreal, P.Q., Canada H3G 1M8 b The Sprott School of Business, Carleton University, 1715 Dunton Tower, 1125 Colonel By Drive, Ottawa, ON, Canada K1S 5B6 article info abstract Article history: Received 10 March 2011 Received in revised form 8 May 2012 Accepted 10 May 2012 Available online 16 May 2012 Consistent with economic intuition and the intuition behind momentum strategies for market timing and sector rotation based on accrual earnings (AE), we find persistence in AE growth rates at the market and industry levels in the short run, and neither persistence nor mean reversion at both levels in the long run. Forecasted industrial production, GDP growth, term premium and default premium exhibit predictive power for short- but not long-term AE growth rates at the market level, and capital intensity and product type exhibit predictive power for both short- and long-term AE growth rates at the industry level. In contrast for growth rates of cash flows (CF), we find mean reversion and neither mean reversion nor persistence in the short- and long-run, respectively, at the market and industry levels. © 2012 Elsevier Inc. All rights reserved. JEL classification: C21 C22 G10 M41 Keywords: Persistence Mean-reversion Growth rates Earnings Cash flows 1. Introduction Although theoretical asset valuation models favor the use of cash-flow and cash-flow growth rates, earnings and earnings growth rates are widely used in share valuation and performance measurement settings by practitioners. 2 Evidence of persistence in the aggregate growth rates of metrics, such as accrual earnings (AE) and cash flows (CF), is useful for a variety of portfolio management decisions, such as those related to market and sectoral risk premiums, policy and tactical asset allocation, earnings quality assessment, market and industry forecasts of strategists and analysts, implementation of momentum or contrarian investment strategies, and sector rotational strategies. 3 In fact, asset allocation (i.e., the distribution of investment wealth among International Review of Economics and Finance 25 (2013) 13–23 ⁎ Corresponding author. Tel.: + 1 514 848 2424, local 2782; fax: +1 514 848 4500. E-mail addresses: lawrence.kryzanowski@concordia.ca (L. Kryzanowski), sana_mohsni@carleton.ca (S. Mohsni). 1 Tel.: +1 613 520 2600x2991. 2 If correctly developed, pricing models using discounted cash-flow, earnings or dividends lead to identical solutions. 3 Hong, Torous, and Valkanov (2007) find that the returns of a significant number of industry portfolios predict stock market movements by up to two months, and that this finding is robust for the eight largest non-US stock markets. Their findings suggest that stock markets react with a delay to information contained in industry returns about their fundamentals and that information diffuses only gradually across markets. 1059-0560/$ – see front matter © 2012 Elsevier Inc. All rights reserved. doi:10.1016/j.iref.2012.05.003 Contents lists available at SciVerse ScienceDirect International Review of Economics and Finance journal homepage: www.elsevier.com/locate/iref