The Aggregate Earnings-Return Relationship: A Global Perspective

Posted: 23 Jun 2011

See all articles by Andrew Vivian

Andrew Vivian

Loughborough University

Xiaoquan Jiang

Florida International University (FIU) - Department of Finance

Date Written: March 15, 2011

Abstract

This article examines the relationship between aggregate earnings and returns (ERC) in a global context. We examine a broad international sample of countries which encompass markets with different levels of stock market development, shareholder protection and legal origin. Recent literature finds a puzzlingly negative relationship between aggregate earnings and aggregate returns in the US (Kothari, Lewellen and Warner, 2006; Sadka and Sadka, 2009). Our first main finding is that this puzzlingly negative relationship is not universal.

The relationship between aggregate earnings and each return component (Campbell, 1991) is examined. Empirical results suggest each of these three components play a role in explaining the overall ERC. In particular, we find that cash flow news and discount rate news are both individually important determinants of the earnings-return relationship but they generally offset each other. The expected earnings-return relation also contributes to the aggregate earnings-return coefficient; this effect varies substantially across countries. The dispersion of aggregate ERC across countries is weakly associated with stock market development, shareholder protection and legal origin.

Keywords: global aggregate earnings-return relation, ERC, return decomposition

JEL Classification: G10, G15, G30

Suggested Citation

Vivian, Andrew and Jiang, Xiaoquan, The Aggregate Earnings-Return Relationship: A Global Perspective (March 15, 2011). Available at SSRN: https://ssrn.com/abstract=1787332 or http://dx.doi.org/10.2139/ssrn.1787332

Andrew Vivian (Contact Author)

Loughborough University ( email )

The Business School
Ashby Road
Loughborough LE11 3TU
Great Britain

Xiaoquan Jiang

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

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