Accounting Data, Market Values, and the Cross Section of Expected Returns Worldwide

Akash Chattopadhyay, Matthew Robert Lyle, Charles C Y Wang

Research output: Working paper

Abstract

Under fairly general assumptions, expected stock returns are a linear combination of two accounting fundamentals ― book to market and ROE. Empirical estimates based on this relation predict the cross section of out-of-sample returns in 26 of 29 international equity markets, with a highly significant average slope coefficient of 1.05. In sharp contrast, standard factor-model-based proxies fail to exhibit predictive power internationally. We show analytically and empirically that the importance of ROE in forecasting returns depends on the quality of accounting information. Overall, a tractable accounting-based valuation model provides a unifying framework for obtaining reliable proxies of expected returns worldwide.
Original languageEnglish (US)
PublisherSocial Science Research Network (SSRN)
Number of pages60
StatePublished - Jan 15 2016

Fingerprint

Predictive power
Market value
Valuation model
Book-to-market
Cross section
International equity markets
Accounting data
Coefficients
Expected returns
Accounting information
Stock returns

Cite this

Chattopadhyay, A., Lyle, M. R., & Wang, C. C. Y. (2016). Accounting Data, Market Values, and the Cross Section of Expected Returns Worldwide. Social Science Research Network (SSRN).
Chattopadhyay, Akash ; Lyle, Matthew Robert ; Wang, Charles C Y. / Accounting Data, Market Values, and the Cross Section of Expected Returns Worldwide. Social Science Research Network (SSRN), 2016.
@techreport{4f6057f2165d4aeca841f9f1d155f0a9,
title = "Accounting Data, Market Values, and the Cross Section of Expected Returns Worldwide",
abstract = "Under fairly general assumptions, expected stock returns are a linear combination of two accounting fundamentals ― book to market and ROE. Empirical estimates based on this relation predict the cross section of out-of-sample returns in 26 of 29 international equity markets, with a highly significant average slope coefficient of 1.05. In sharp contrast, standard factor-model-based proxies fail to exhibit predictive power internationally. We show analytically and empirically that the importance of ROE in forecasting returns depends on the quality of accounting information. Overall, a tractable accounting-based valuation model provides a unifying framework for obtaining reliable proxies of expected returns worldwide.",
author = "Akash Chattopadhyay and Lyle, {Matthew Robert} and Wang, {Charles C Y}",
year = "2016",
month = "1",
day = "15",
language = "English (US)",
publisher = "Social Science Research Network (SSRN)",
type = "WorkingPaper",
institution = "Social Science Research Network (SSRN)",

}

Chattopadhyay, A, Lyle, MR & Wang, CCY 2016 'Accounting Data, Market Values, and the Cross Section of Expected Returns Worldwide' Social Science Research Network (SSRN).

Accounting Data, Market Values, and the Cross Section of Expected Returns Worldwide. / Chattopadhyay, Akash; Lyle, Matthew Robert; Wang, Charles C Y.

Social Science Research Network (SSRN), 2016.

Research output: Working paper

TY - UNPB

T1 - Accounting Data, Market Values, and the Cross Section of Expected Returns Worldwide

AU - Chattopadhyay, Akash

AU - Lyle, Matthew Robert

AU - Wang, Charles C Y

PY - 2016/1/15

Y1 - 2016/1/15

N2 - Under fairly general assumptions, expected stock returns are a linear combination of two accounting fundamentals ― book to market and ROE. Empirical estimates based on this relation predict the cross section of out-of-sample returns in 26 of 29 international equity markets, with a highly significant average slope coefficient of 1.05. In sharp contrast, standard factor-model-based proxies fail to exhibit predictive power internationally. We show analytically and empirically that the importance of ROE in forecasting returns depends on the quality of accounting information. Overall, a tractable accounting-based valuation model provides a unifying framework for obtaining reliable proxies of expected returns worldwide.

AB - Under fairly general assumptions, expected stock returns are a linear combination of two accounting fundamentals ― book to market and ROE. Empirical estimates based on this relation predict the cross section of out-of-sample returns in 26 of 29 international equity markets, with a highly significant average slope coefficient of 1.05. In sharp contrast, standard factor-model-based proxies fail to exhibit predictive power internationally. We show analytically and empirically that the importance of ROE in forecasting returns depends on the quality of accounting information. Overall, a tractable accounting-based valuation model provides a unifying framework for obtaining reliable proxies of expected returns worldwide.

M3 - Working paper

BT - Accounting Data, Market Values, and the Cross Section of Expected Returns Worldwide

PB - Social Science Research Network (SSRN)

ER -

Chattopadhyay A, Lyle MR, Wang CCY. Accounting Data, Market Values, and the Cross Section of Expected Returns Worldwide. Social Science Research Network (SSRN). 2016 Jan 15.