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The Most Important Firm Fundamental?

August 26, 2022 • Posted in Fundamental Valuation

What kind of firm growth should long-term investors value most? In his August 2022 paper entitled “The Role of Net Income Growth in Explaining Long-Horizon Stock Returns”, Hendrik Bessembinder relates decade compound stock returns to same-decade growth in firm net income, sales and assets and same-decade average profitability (income-to-assets ratio). His universe consists of U.S. common stocks/decades with available data and inflation-adjusted (to end-of-sample) market capitalization at least $500 million at the beginning of a decade. He further excludes firm/decades with net income-to-total assets ratio at the beginning of the decade less than 0.15% (the bottom percentile of profitable firms). He calculates both decade excess returns (relative to U.S. Treasury bill return) and decade returns relative to that of the value-weighted U.S. stock market, both expressed on an annualized basis. For growth variables, he measures growth based on differences between the last and first years of a decade, and ultimately excludes the top and bottom 1% to mitigate effects of extreme outliers. For each decade and each variable, he then ranks stocks into fifths (quintiles) and calculates the difference in average returns between the highest and lowest quintiles. He looks at the full sample of five decades and subsamples of the early decades (1970s and 1980s) and recent decades (1990s, 2000s, 2010s). Using the specified accounting data and associated stock returns during January 1970 through December 2019, he finds that:


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