Decomposing the earnings-to-price ratio and the cross-section of international equity-index returns

We examine whether components of the earnings-to-price (EP) ratio can be used to extract incremental information to better estimate future returns in the cross-section of country-industry indexes. We demonstrate that the EP components, such as lagged EP, changes in earnings, short-term momentum and long-term reversal in prices increase the accuracy of return forecasts. The EP decomposition matters in developed markets but is pointless in emerging countries. The results are robust to modifications in the methodology, sub-period analyses, the use of an alternative sample and remain unchanged after controlling for net share issuance, size, and fixed country and time effects.