Understanding the Drivers of Firm-level Stock Returns: An International Perspective

Thumbnail Image



Journal Title

Journal ISSN

Volume Title


Research Projects

Organizational Units

Journal Issue


At social occasions, economists are often asked to interpret the movement of stock returns. In response, they have developed theories that break unexpected stock returns into changes in expectations of future cash flow and changes in expectations of future returns. Intuitively, one can call the former "news about future cash flow", or cash-flow news, and the latter "news about future returns", or expected-return news. It helps to understand how stock returns move to examine which news component is more important in terms of driving stock returns. By using US firms, researchers have empirically documented that cash-flow news dominates expected-return news in terms of explaining the variance of unexpected stock returns. However, little effort has been spent on understanding how the relative importance of these two news components varies with other economic factors, such as market opaqueness, financial market development, and investor protection. An international setting offers opportunities to understand the link between these country characteristics and the relative importance of news components. As a first step toward this goal, this paper uses the vector autoregressive model (VAR) developed by Campbell (1991) and Vuolteenaho (2002) to decompose firm-level stock returns for 29 countries around the world. By using a country-level earnings management measure developed by Leuz et al. (2003), we find that expected-return news is more important in driving unexpected stock return in countries where the earnings management is more extensive.


Business: 2nd Place (The Ohio State University Edward F. Hayes Graduate Research Forum)


Return Decomposition, International Finance, Earnings Management