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 language||English (US)|
|Publisher||Social Science Research Network (SSRN)|
|Number of pages||60|
|State||Published - Jan 15 2016|
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). http://ssrn.com/abstract=2613366