Accounting Data, Market Values, and the Cross Section of Expected Returns Worldwide

60 Pages Posted: 2 Jun 2015 Last revised: 19 Jan 2016

Date Written: January 15, 2016


Under fairly general assumptions, expected stock returns are a linear combination of two accounting fundamentals ― book to market and ROE. Empirical estimates based on this relation predict the cross section of out-of-sample returns in 26 of 29 international equity markets, with a highly significant average slope coefficient of 1.05. In sharp contrast, standard factor-model-based proxies fail to exhibit predictive power internationally. We show analytically and empirically that the importance of ROE in forecasting returns depends on the quality of accounting information. Overall, a tractable accounting-based valuation model provides a unifying framework for obtaining reliable proxies of expected returns worldwide.

Keywords: Expected returns, discount rates, fundamental valuation, present value, information quality, international equity markets

JEL Classification: D83, G12, G14, M41

Suggested Citation

Chattopadhyay, Akash and Lyle, Matthew R. and Wang, Charles C. Y., Accounting Data, Market Values, and the Cross Section of Expected Returns Worldwide (January 15, 2016). Harvard Business School Accounting & Management Unit Working Paper No. 15-092, Available at SSRN: or

Akash Chattopadhyay

University of Toronto - Rotman School of Management ( email )

105 St George Street
Toronto, Ontario M5S 3G8

Matthew R. Lyle

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Charles C. Y. Wang (Contact Author)

Harvard Business School (HBS) ( email )

Soldiers Field
Boston, MA 02163
United States

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