Earnings Expectations during the COVID-19 Crisis #MMPMIDC7543542
Landier A; Thesmar D
Rev Asset Pricing Stud ä[]; ä (ä): ä PMIDC7543542show ga
We analyze the dynamics of earnings forecasts and discount rates implicit in valuations during the COVID-19 crisis. Forecasts over 2020 earnings have been progressively reduced by 16%. Longer-run forecasts have reacted much less. We estimate an implicit discount rate going from 10% in mid-February to 13% at the end of March and reverting to its initial level in mid-May. Over this period, the unlevered asset risk premium is unchanged, as the risk-free rate drop is compensated by the effect of increased leverage. Hence, analysts? forecast revisions explain all of the decrease in equity values between January 2020 and mid-May 2020.