Lee, Charles M. C.So, Eric C.Wang, Charles2014-11-062014-11-06Lee, Charles M.C., Eric C. So, and Charles C.Y. Wang. "Evaluating Firm-Level Expected-Return Proxies." Harvard Business School Working Paper, No. 15-022, October 2014.http://nrs.harvard.edu/urn-3:HUL.InstRepos:13350443We develop and implement a rigorous analytical framework for empirically evaluating the relative performance of firm-level expected-return proxies (ERPs). We show that superior proxies should closely track true expected returns both cross-sectionally and over time (that is, the proxies should exhibit lower measurement-error variances). We then compare five classes of ERPs nominated in recent studies to demonstrate how researchers can easily implement our two-dimensional evaluative framework. Our empirical analyses document a tradeoff between time-series and cross-sectional ERP performance, indicating the optimal choice of proxy may vary across research settings. Our results illustrate how researchers can use our framework to critically evaluate and compare a growing body of ERPs.en-USResearch Paper or Report2014-11-06