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What Drives Firm-Level Stock Returns?

  • Tuomo Vuolteenaho
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    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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    File URL: http://www.nber.org/papers/w8240.pdf
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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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    Publication status: published as Vuolteenaho, Tuomo. "What Drives Firm-Level Stock Returns?," Journal of Finance, 2002, v57(1,Feb), 233-264.
    Handle: RePEc:nbr:nberwo:8240
    Note: AP
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