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

47 Pages Posted: 26 Feb 2018 Last revised: 20 Feb 2021

Date Written: January 21, 2021


This study provides the first large-scale study of the performance of expected-return proxies (ERPs) internationally. Analyst-forecast-based ICCs 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 adapt and extend the log-linear and present-value (LPV) framework—combining an accounting valuation anchor, its expected growth, and market prices—for estimating ERPs internationally, and implement a correction for the use of stale accounting data. An LPV ERP anchored on the book value of equity is positively associated with future returns in 26 of 29 equity markets, and largely subsumes the predictive ability of a broad set of firm characteristics previously shown to be associated with expected returns.

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 (January 21, 2021). Harvard Business School Accounting & Management Unit Working Paper No. 18-079, The Accounting Review, Forthcoming, 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 (HBS) ( email )

Soldiers Field
Boston, MA 02163
United States

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