The Association Between Earnings and Returns and Macroeconomic Performance: Evidence from Australia, the U.S., and China

Abstract

We provide some initial descriptive and exploratory results concerning the earnings-returns relation in periods of poor versus strong macroeconomic performance. Based on data from three countries – Australia, the U.S., and China – our results indicate some differences for U.S. and Chinese firms, but not Australian firms. However the results for U.S. and Chinese firms are somewhat contradictory – U.S. (Chinese) firms generally exhibit a stronger (weaker) earnings-returns association in periods of both negative and strongly positive macroeconomic performance. These differences appear largely attributable to reported profits and not to losses. We find no evidence that poor earnings news released during periods such as the GFC is ‘punished’ relative to other periods.

Keywords: general economic conditions, the earnings-returns relation

JEL Classification: M4