Macro to Micro: Country Exposures, Firm Fundamentals and Stock Returns

Abstract:     
We outline a systematic approach to incorporate macroeconomic information into firm level forecasting from the perspective of an equity investor. Using a global sample of 381,030 firm-years over the 1998-2010 time period, we find that combining firm level exposures to countries (via geographic segment data) with forecasts of country level performance, is able to generate superior out of sample forecasts for firm fundamentals. We further find that this forecasting benefit is not incorporated into sell side analyst earnings and sales forecasts in a timely manner. Finally, we provide evidence that country exposures are able to improve explanatory power of characteristic regressions of equity returns and this return predictability does not appear to be explained by standard risk factors. These relations are stronger for non-US firms, and are attributable to both home country and foreign country exposures.

Number of Pages in PDF File: 68

Keywords: macroeconomic exposures, earnings, stock returns, geographic segments, Consensus Economics

JEL Classification: G12, G14, M41

working papers series