Risky Value

Topics - Equities

${ numberSection } ${ text }
Risky Value

Working Paper

This paper uses an accounting-based approach to identify growth characteristics that can help explain equity returns at the country level for a sample of 30 countries over the past two decades.

Most previous country level empirical research has focused on dividends, perhaps due to the availability of long-run data on dividends or to prior theories being more focused on dividends rather than accounting fundamentals. Dividends are problematic because: (i) dividend policies are endogenously chosen by firms, (ii) dividends tend to vary only gradually due to signaling incentives and clientele effects, (iii) there is a declining trend in dividends and an increasing substitution by share repurchases, and (iv) dividends create potentially distorting tax effects.

Furthermore, a focus on dividends only provides partial coverage of firms in the cross-section as the dividend ratio (dividend/price) would be irrelevant for firms that do not pay dividends. At the country level, this firm level heterogeneity in dividends introduces noise. As a result, dividends are a poor measure of fundamental value.

Instead, we examine whether fundamental accounting characteristics associated with future earnings growth, in particular earnings and book values, explain cross-sectional variation in country level returns.

Using a panel of 6,600 country-month return observations over the period March 1993 through to June 2011 covering 30 countries, we find strong evidence that earnings-to-price ratios (E/P) and book-to-price ratios (B/P) jointly explain cross-sectional variation in country level returns.

A key implication of our results is that combining measures of value, such as E/P and B/P, offers a theoretically superior way to measure expected returns.

AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which AQR.com has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites.


The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.


Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight.  Hypothetical performance results are presented for illustrative purposes only.


Diversification does not eliminate the risk of experiencing investment loss.


Certain publications may have been written prior to the author being an employee of AQR.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.


AQR Capital Management is a global investment management firm, which may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR.