1990 Reports

Fundamentals and stock returns in Japan

Chan, Louis K. C.; Lakonishock, Josef; Hamao, Yasushi

This paper relates cross-sectional differences in returns on Japanese stocks to the underlying behavior of four fundamental 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 non-manufacturing firms, companies from both sections of the Tokyo Stock Exchange, and also delisted securities. Our findings reveal a significant relationship between fundamental variables and expected returns in the Japanese market. Of the four fundamental variables considered, the book to market ratio and cash flow yield have the most significant positive impact on expected returns.