Evaluating firm-level expected-return proxies
By: Charles M.C. Lee, Eric C. So, Charles C.Y. Wang
Contributors: Wang, Charles C.Y, author; So, Eric C., author; Harvard Business School
Series: Working paper / Harvard Business School -- 15-022; Working paper (Harvard Business School) -- 15-022.
Publisher: Harvard Business School
Published: 2014
Place of publication: Boston]
Language: eng
Number of pages: 43
Description: We develop and implement a rigorous analytical framework for empirically evaluating the relative performance of firm-level expected-return proxies (ERPs). We show that superior proxies should closely track true expected returns both cross-sectionally and over time (that is, the proxies should exhibit lower measurement-error variances). We then compare five classes of ERPs nominated in recent studies to demonstrate how researchers can easily implement our two-dimensional evaluative framework. Our empirical analyses document a tradeoff between time-series and cross-sectional ERP performance, indicating the optimal choice of proxy may vary across research settings. Our results illustrate how researchers can use our framework to critically evaluate and compare a growing body of ERPs.
Notes: "October 2014" -- Publisher's website.

Includes bibliographical references (pages 26-28).