Is the U.S. Unique? International Evidence on the Aggregate Earnings-Returns Association

• In Event: Globalization and domestic institutions

Abstract

He and Hu (2014) examine the aggregate earnings-returns relation in an international setting and find that the negative association is unique to the US. We revisit this evidence and show that the US is not unique—the difference is explained primarily by time-series variation in the aggregate earnings-returns relation. More importantly, we exploit cross-country differences in monetary policy and disclosure environment to shed light on what drives cross-country differences in the aggregate earnings-returns relation. We find that the earnings-returns association is more negative (less positive) in countries where aggregate earnings contain more policy news as well as in countries that have a stronger market reaction to policy shocks. Overall, our results suggest that monetary policy plays an important role in explaining the relation between aggregate earnings and stock returns not only in the US, but also in other countries. Our study provides the first out-of-sample international evidence on what drives the aggregate earnings-returns relation.

Authors

• Lindsey A Gallo, University of Michigan-Ann Arbor

• Rebecca Hann, University of Maryland-College Park

• Congcong Li, Singapore Management University

• Viktoriya V Zotova, University of Maryland