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What Drives Firm-Level Stock Returns?

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Author Info
Tuomo Vuolteenaho (Harvard University)
Abstract

I use a vector autoregressive model (VAR) to decompose an individual firm's stock return into two components: changes in cash-flow expectations (i.e., cash-flow news) and changes in discount rates (i.e., expected-return news). The VAR yields three main results. First, firm-level stock returns are mainly driven by cash-flow news. For a typical stock, the variance of cash-flow news is more than twice that of expected-return news. Second, shocks to expected returns and cash flows are positively correlated for a typical small stock. Third, expected-return-news series are highly correlated across firms, while cash-flow news can largely be diversified away in aggregate portfolios. Copyright The American Finance Association 2002.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 57 (2002)
Issue (Month): 1 (02)
Pages: 233-264
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Handle: RePEc:bla:jfinan:v:57:y:2002:i:1:p:233-264

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  1. Lily Qiu & Gerard Hoberg, 2006. "Growth to Value: A Difficult Journey for IPOs and Concentrated Industries," Working Papers 2005-17, Brown University, Department of Economics. [Downloadable!]
  2. Francis Longstaff & Monika Piazzesi, 2003. "Corporate Earnings and the Equity Premium," NBER Working Papers 10054, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Kothari, S.P. & Lewellen, Jonathan & Warner, Jerold, 2003. "Stock Returns, Aggregate Earnings Surprises, And Behavioral Finance," Working papers 4284-03, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  4. Martin Lettau & Jessica Wachter, 2005. "Why is Long-Horizon Equity Less Risky? A Duration-Based Explanation of the Value Premium," NBER Working Papers 11144, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. John Y. Campbell & Tuomo Vuolteenaho, 2003. "Bad Beta, Good Beta," NBER Working Papers 9509, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Stefano DellaVigna & Joshua M. Pollet, 2005. "Attention, Demographics, and the Stock Market," NBER Working Papers 11211, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Owen A. Lamont & Jeremy C. Stein, 2005. "Investor Sentiment and Corporate Finance: Micro and Macro," NBER Working Papers 11882, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Malcolm Baker & Stefan Nagel & Jeffrey Wurgler, 2006. "The Effect of Dividends on Consumption," NBER Working Papers 12288, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. John Campbell & Tarun Ramadorai & Tuomo Vuolteenaho, 2004. "Caught On Tape: Predicting Institutional Ownership With Order Flow," Finance 0405012, EconWPA. [Downloadable!]
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  10. Randolph B. Cohen & Paul A. Gompers & Tuomo Vuolteenaho, 2002. "Who Underreacts to Cash-Flow News? Evidence from Trading between Individuals and Institutions," NBER Working Papers 8793, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Owen A. Lamont & Jeremy C. Stein, 2006. "Investor Sentiment and Corporate Finance: Micro and Macro," American Economic Review, American Economic Association, vol. 96(2), pages 147-151, May. [Downloadable!]
  12. Christopher Polk & Samuel Thompson & Tuomo Vuolteenaho, 2004. "New Forecasts of the Equity Premium," NBER Working Papers 10406, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Peter Hecht & Tuomo Vuolteenaho, 2005. "Explaining Returns with Cash-Flow Proxies," NBER Working Papers 11169, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Tano Santos & Pietro Veronesi, 2004. "Conditional Betas," NBER Working Papers 10413, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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