Fundamentals and Stock Returns in Japan





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    • Louis Chan and Josef Lakonishok are from the College of Commerce and Business Administration, University of Illinois at Urbana-Champaign. Yasushi Hamao is from the Graduate School of Business, Columbia University. The article has been presented at the American Finance Association meetings in Washington, the Berkeley Program in Finance in Tokyo and Santa Barbara, the University of California at Irvine, the University of California at San Diego, the University of Chicago, the Conference on Capital Markets of the Pacific Rim at New York University, the CRSP Seminar on the Analysis of Security Prices at Chicago, the European Finance Association meetings in Athens, the FAIR/NBER conference, the University of Illinois, INSEAD, the University of Limburg, the Netherlands, the London Business School, the University of Minnesota, Princeton University, Purdue University, Rice University, Rutgers University, the Stockholm School of Economics, and the Western Finance Association meetings in Jackson Hole. The authors appreciate helpful comments by Amir Barnea, Bill Bryan, John Campbell, Nai-Fu Chen, Glen Donaldson, Wayne Ferson, Bjorn Flesaker, Trevor Harris, Ravi Jagannathan, Don Keim, Richard Leftwich, Claudio Loderer, Craig MacKinlay, Jay Ritter, Dennis Sheehan, Andrei Shleifer, Neal Stoughton, Yuk Tse, the editor René Stulz, and an anonymous referee. We are also grateful to Takeo Hoshi and Bing Yeh for their help with data collection and to Brian Bielinski for research assistance.


This paper relates cross-sectional differences in returns on Japanese stocks to the underlying behavior of four variables: earnings yield, size, book to market ratio, and cash flow yield. Alternative statistical specifications and various estimation methods are applied to a comprehensive, high-quality data set that extends from 1971 to 1988. The sample includes both manufacturing and nonmanufacturing firms, companies from both sections of the Tokyo Stock Exchange, and also delisted securities. Our findings reveal a significant relationship between these variables and expected returns in the Japanese market. Of the four variables considered, the book to market ratio and cash flow yield have the most significant positive impact on expected returns.