Accounting Data, Market Values, and the Cross Section of Expected Returns Worldwide
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CitationChattopadhyay, Akash, Matthew R. Lyle, and Charles C.Y. Wang. "Accounting Data, Market Values, and the Cross Section of Expected Returns Worldwide." Harvard Business School Working Paper, No. 15-092, June 2015. (Revised August 2015.)
AbstractUnder 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.
Citable link to this pagehttp://nrs.harvard.edu/urn-3:HUL.InstRepos:16198221
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