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: Suggested Citation