Abstract
This study provides the first large-scale study of the performance of expected-return proxies (ERPs) internationally. Analyst-forecast-based ICCs are sparsely populated and not robustly associated with future returns. Earnings-model-forecast-based ICCs are well-populated, but are unreliable outside the U.S. We adapt and extend the log-linear and present-value (LPV) framework-combining an accounting valuation anchor, its expected growth, and market prices-for estimating ERPs internationally, and implement a correction for the use of stale accounting data. An LPV ERP anchored on the book value of equity is positively associated with future returns in 26 of 29 equity markets, and largely subsumes the predictive ability of a broad set of firm characteristics previously shown to be associated with expected returns.
Original language | English (US) |
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Pages (from-to) | 107-133 |
Number of pages | 27 |
Journal | Accounting Review |
Volume | 97 |
Issue number | 1 |
DOIs | |
State | Published - 2022 |
Funding
We thank Rodrigo S. Verdi (editor) and two anonymous referees for valuable guidance on the paper. For helpful comments and suggestions, we are grateful for Ryan Buell, Craig Chapman, Peter Easton, Joseph Gerakos, Ian Gow, Jeremiah Green, Paul Healy, Bob Magee, Daniel Malter, Jim Naughton, Scott Richardson, Tatiana Sandino, Pian Shu, Richard Sloan, Eric So, Suraj Srinivasan, Phil Stocken, Tuomo Vuolteenaho, Beverly Walther, Clare Wang, Teri Yohn, and Lu Zhang, and workshop participants at University of Alberta, Arizona State University, Citadel Quantitative Research, Duke University, University of Calgary Haskayne School of Business, Indiana University, University of Illinois at Chicago, Northwestern University Kellogg School of Management, University of Miami, and National Chengchi University. We thank Kyle Thomas, James Zeitler, and Rishabh Aggarwal for excellent research assistance. Matthew R. Lyle is grateful for generous funding provided through the Lawrence Revsine Research Fellowship.
Keywords
- discount rates
- expected returns
- fundamental valuation
- implied cost of capital
- international equity markets
- present value
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics