Author Abstract
Expected return proxies (ERP) derived from a log-linear present-value (LPV) framework—combining the book value of equity, profitability, and market prices—predict the cross section of out-of-sample returns in 26 of 29 international equity markets, with a highly significant average slope coefficient of close to 1. In contrast, ERPs based on the implied cost of equity or standard factor models—even those with factors based on book-to-market and profitability—fail to exhibit systematic predictive power internationally. LPV models derived using common valuation anchors such as earnings or sales also exhibit predictive ability. LPV ERPs based on the book value of equity and sales subsume the predictive ability of all other ERPs we examine. Collectively, the LPV framework offers a parsimonious accounting-based framework for the estimation of expected returns across international markets.
Paper Information
- Full Working Paper Text
- Working Paper Publication Date: February 2018
- HBS Working Paper Number: HBS Working Paper #18-079
- Faculty Unit(s): Accounting and Management
