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What Drives Firm-Level Stock Returns?

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Author Info
Tuomo Vuolteenaho
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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8240.

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Date of creation: Apr 2001
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Handle: RePEc:nbr:nberwo:8240

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Lin, Xiaoji, 2009. "Endogenous technological progress and the cross section of stock returns," MPRA Paper 14829, University Library of Munich, Germany. [Downloadable!]
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