Risky Value

55 Pages Posted: 17 Sep 2013 Last revised: 13 Mar 2020

See all articles by Atif Ellahie

Atif Ellahie

University of Utah - David Eccles School of Business

Michael Katz

AQR Capital Management, LLC

Scott A. Richardson

London Business School; Acadian Asset Management

Date Written: March 2020


We use an accounting-based approach to link two primary measures of ‘value’ to expected returns for countries: earnings-to-price (E/P) and book-to-price (B/P). We document that when country-level earnings are less affected by accounting distortions related to conservative accounting for uncertain investments, E/P is close to a sufficient statistic for expected returns. However, when earnings are more affected by accounting distortions, B/P is needed. We find that high B/P countries are, on average, facing temporarily depressed current earnings, in part due to conservative accounting for uncertain investments, and their recovery in future earnings growth is uncertain. Countries with high B/P also exhibit greater downside sensitivity to global earnings growth, which supports our interpretation that B/P reflects systematic risk in future earnings growth. We also find stronger results in low E/P countries which points to the joint importance of E/P and B/P. Further, cross-country differences in unconditional accounting conservatism help to explain differences in the relative importance of E/P and B/P.

Keywords: equity risk premium, country returns, earnings growth, book-to-price, earnings yield

JEL Classification: G12

Suggested Citation

Ellahie, Atif and Katz, Michael and Richardson, Scott Anthony, Risky Value (March 2020). Available at SSRN: https://ssrn.com/abstract=2325524 or http://dx.doi.org/10.2139/ssrn.2325524

Atif Ellahie (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Michael Katz

AQR Capital Management, LLC ( email )

Two Greenwich Plaza, 3rd Floor
Greenwich, CT 06830
United States
203 742 3854 (Phone)
203 742 3354 (Fax)

HOME PAGE: http://www.aqr.com

Scott Anthony Richardson

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Acadian Asset Management ( email )

260 Franklin Street
Boston, MA 02110
United States

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