Journal of Accounting and Economics
In an increasingly interconnected global system of economic and financial markets, understanding the macroeconomic landscape is important. Rapid changes in the relative economic importance of countries suggest that a company’s geographic exposure should be useful to an investor seeking to forecast future cash flows and associated risks.
However, surprisingly little archival, empirical research has examined these relations. In this paper we seek to address that information gap by examining whether information about a company’s geographic exposure is useful for forecasting firm fundamentals and stock returns.
We outline an approach to incorporate macroeconomic information into firm-level forecasts. Using a large sample of publicly traded firms around the world, we show that combining geographic segment sales disclosures and forecasts of country-level performance generates significant improvement in forecasting firm level profitability. This predictive power is particularly strong for domestic firms. We also find that stock prices are slow to incorporate this information.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons.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.