COVID-19 Impacts on Stock Valuation

What are the roles of changes in earnings forecasts and the discount rate on stock valuation during the COVID-19 stock market crash? In the May 2020 update of their paper entitled “Earnings Expectations in the COVID Crisis”, Augustin Landier and David Thesmar investigate firm-level analyst earnings forecast revisions and discount rate changes as jointly reflected in stock market behavior during COVID-19 discovery and spread. They further decompose the effect of discount rate changes into impacts of: (1) change in interest rates, (2) change in equity risk premium and (3) the leverage effect (declining stock prices driving an increase in expected equity return). Using analyst earnings forecasts and prices for the top 1000 U.S. stocks by market capitalization as of year-end 2019, and contemporaneous interest rates, during January 2020 through mid-May 2020, they find that:

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