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

We exploit differences in institutional and macroeconomic environments to shed light on what drives variation in the aggregate earnings-returns relation over time within the U.S. and across countries. We find that both intertemporal and cross-country variation in the aggregate earnings-returns association are driven primarily by two factors, namely, the monetary policy news conveyed in aggregate earnings and the market reaction to that news, which suggest that the strength of the discount rate news channel plays an important role in explaining the aggregate earnings-returns relation both within and outside of the U.S. We further find that institutional characteristics have a significant effect on the information content of aggregate earnings and hence on the aggregate earnings-returns association—aggregate earnings are more informative about policy changes in countries with stronger investor protection and greater accounting transparency. Overall, our study provides new evidence on what drives the aggregate earnings-returns relation across the globe.