Expected Stock Returns Worldwide: A Log-Linear Present-Value Approach

65 Pages Posted: 26 Feb 2018 Last revised: 18 Sep 2019

Date Written: September 16, 2019


This is the first large-scale study of the performance of expected-return proxies (ERPs) internationally. Analyst-forecast-based ICCs are commonly used to study how policies affect expected returns in international settings, but they are sparsely populated and not robustly associated with future returns. Earnings-model-forecast-based ICCs are well populated, but are unreliable outside the U.S. We provide a solution from a log-linear and present-value (LPV) framework-- combining an accounting valuation anchor, its expected growth, and market prices-- and adapt it to estimate ERPs in a global context. An LPV ERP anchored on the book value of equity is associated with future returns in each of the 29 equity markets we study, and largely subsumes the out-of-sample predictive ability of the most common firm characteristics that have been shown to be associated with expected returns. Our findings also suggest that a firm's life-cycle stage provides useful information for ERP estimation.

Keywords: Expected returns; Discount rates; Fundamental valuation; Implied cost of capital; International equity markets; Present value.

JEL Classification: D83, G12, G14, M41

Suggested Citation

Chattopadhyay, Akash and Lyle, Matthew R. and Wang, Charles C. Y., Expected Stock Returns Worldwide: A Log-Linear Present-Value Approach (September 16, 2019). Harvard Business School Accounting & Management Unit Working Paper No. 18-079, Available at SSRN: https://ssrn.com/abstract=3129086 or http://dx.doi.org/10.2139/ssrn.3129086

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 ( email )

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

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