Earnings and Expected Returns


  • Owen Lamont

    1. Graduate School of Business, University of Chicago and NBER
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    • Graduate School of Business, University of Chicago and NBER. I thank Nicholas Barberis, Olivier Jean Blanchard, Kent Daniel, Eugene Fama, Martin Feldstein, David Gross, Michael Horvath, Charles M. Jones, Timothy Johnson, Steven Kaplan, Mark Mitchell, Jim Poterba, Jeffrey Russell, Jess Saá-Requejo, René Stulz, Robert Vishny, Paul Zarowin, Luigi Zingales, an anonymous referee, workshop participants at MIT, Purdue, the University of California at Davis, the University of Chicago, the University of Illinois at Urbana-Champaign, and Wharton, and especially John Cochrane for helpful comments. I thank Amy C. Ko for research assistance and Roger Ibbotson for data. This work was supported by the Center for Research in Securities Prices and the FMC Faculty Research Fund at the Graduate School of Business, University of Chicago.


The aggregate dividend payout ratio forecasts excess returns on both stocks and corporate bonds in postwar U.S. data. High dividends forecast high returns. High earnings forecast low returns. The correlation of earnings with business conditions gives them predictive power for returns; they contain information about future returns that is not captured by other variables. Dividends and earnings contribute substantial explanatory power at short horizons. For forecasting long-horizon returns, however, only (scaled) stock prices matter. Forecasts of low long-horizon stock returns in the mid-1990s are caused not by earnings or dividends, but by high stock prices.