Changes in Order Backlog and Future Returns

Abstract

This paper examines whether investors recognize the implications of

changes in order backlog, a non-GAAP leading indicator, for future

performance. A hedge portfolio strategy taking a long position in the

highest decile of order backlog change and a short position in the lowest

decile of order backlog change earns 13.7 percent in the year after the

hedge portfolio is formed. Moreover, analysts forecast errors are large

and negative (overoptimistic) for firms experiencing declines in order

backlog. Overall, our evidence indicates that analysts underreact to the

information in changes in order backlog. In addition, the market does

not appear to see through the relation between changes in order backlog

and future performance and underweights the implications of order

backlog, which contrasts with the findings of Rajgopal, Shevlin, and Venkatachalam (2003).