Macro to micro: Country exposures, firm fundamentals and stock returns

- We use macroeconomic information for firm level forecasting.
- Combining geographic exposures with country level forecasts generates superior forecasts.
- Our forecasting improvement works for stock returns and profitability.
- Forecasting improvement is evident for domestic and multi-national firms.
- The forecasting benefit is greatest after periods of higher country level dispersion.

We outline a systematic approach to incorporate macroeconomic information into firm level forecasting from the perspective of an equity investor. Using a global sample of 198,315 firm-years over the 1998-2010 time period, we find that combining firm level exposures to countries (via geographic segment data) with forecasts of country level performance, is able to generate superior forecasts for firm fundamentals. This result is particularly evident for purely domestic firms. We further find that this forecasting benefit is associated with future excess stock returns. These relations are stronger after periods of higher dispersion in expected country level performance.