Aggregate Earnings and Market Returns: International Evidence

Kothari, Lewellen, and Warner (2006) document that aggregate earnings changes in the United States are negatively related to contemporaneous market returns. In this study we show that this negative aggregate earnings-returns relation is unique to the United States. In 28 non-U.S. markets, aggregate earnings changes are positively associated with contemporaneous market returns. Further evidence shows that the aggregate earnings-returns relation becomes less positive in countries with more transparent financial disclosure that helps investors forecast earnings more precisely. Our result supports Sadka and Sadka's (2009) argument that predictability of aggregate earnings leads to the negative relation between aggregate earnings and market returns in the United States.