Abstract

https://ssrn.com/abstract=2613366
 


 



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


Akash Chattopadhyay


Harvard Business School

Matthew R. Lyle


Northwestern University - Kellogg School of Management

Charles C. Y. Wang


Harvard Business School

January 15, 2016

Harvard Business School Accounting & Management Unit Working Paper No. 15-092

Abstract:     
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.

Number of Pages in PDF File: 60

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

JEL Classification: D83, G12, G14, M41


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Date posted: June 2, 2015 ; Last revised: January 19, 2016

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: https://ssrn.com/abstract=2613366 or http://dx.doi.org/10.2139/ssrn.2613366

Contact Information

Akash Chattopadhyay
Harvard Business School ( email )
Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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 ( email )
Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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