What Drives Firm-Level Stock Returns?

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.

[1]  J. Keynes,et al.  The General Theory of Employment, Interest and Money. , 1936 .

[2]  R. Ball,et al.  An empirical evaluation of accounting income numbers , 1968 .

[3]  E. Fama,et al.  Risk, Return, and Equilibrium: Empirical Tests , 1973, Journal of Political Economy.

[4]  H. White.  A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity , 1980 .

[5]  R. Banz,et al.  The relationship between return and market value of common stocks , 1981 .

[6]  T. Day.  Asset returns and inflation , 1981 .

[7]  R. Thaler,et al.  Does the Stock Market Overreact , 1985 .

[8]  Ronald J. Lanstein,et al.  Persuasive evidence of market inefficiency , 1985 .

[9]  R. Shiller,et al.  The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors , 1986 .

[10]  E. Fama,et al.  Dividend yields and expected stock returns , 1988 .

[11]  R. Shiller,et al.  Stock Prices, Earnings and Expected Dividends , 1988 .

[12]  Laxminarayan Bhandari,et al.  Debt/Equity Ratio and Expected Common Stock Returns: Empirical Evidence , 1988 .

[13]  Victor L. Bernard,et al.  POST-EARNINGS-ANNOUNCEMENT DRIFT - DELAYED PRICE RESPONSE OR RISK PREMIUM , 1989 .

[14]  Eun Sul Lee,et al.  Analyzing Complex Survey Data , 1989 .

[15]  E. Fama,et al.  BUSINESS CONDITIONS AND EXPECTED RETURNS ON STOCKS AND BONDS , 1989 .

[16]  J. Cochrane.  Explaining the Variance of Price Dividend Ratios , 1989 .

[17]  V. Bernard,et al.  Evidence that stock prices do not fully reflect the implications of current earnings for future earnings , 1990 .

[18]  Narasimhan Jegadeesh,et al.  Evidence of Predictable Behavior of Security Returns , 1990 .

[19]  J. Cochrane,et al.  Volatility Tests and Efficient Markets: A Review Essay , 1991 .

[20]  R. Hodrick.  Dividend Yields and Expected Stock Returns: Alternative Procedures for Interference and Measurement , 1991 .

[21]  Volatility Tests and Efficient Markets: A Review Essay , 1991 .

[22]  John Y. Campbell,et al.  What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns , 1991 .

[23]  Campbell R. Harvey,et al.  The Variation of Economic Risk Premiums , 1990, Journal of Political Economy.

[24]  Jay R. Ritter,et al.  Measuring abnormal performance: Do stocks overreact? , 1992 .

[25]  Narasimhan Jegadeesh,et al.  Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency , 1993 .

[26]  Fischer Black,et al.  Beta and Return , 1993 .

[27]  Josef Lakonishok,et al.  Contrarian Investment, Extrapolation, and Risk , 1993 .

[28]  J. Shao,et al.  Jackknife inference for heteroscedastic linear regression models , 1993 .

[29]  W. Rogers.  Regression standard errors in clustered samples , 1994 .

[30]  Roni Michaely,et al.  Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift? , 1994 .

[31]  Theo Vermaelen,et al.  Market Underreaction to Open Market Share Repurchases , 1994 .

[32]  S. P. Kothari,et al.  Another Look at the Cross-section of Expected Stock Returns , 1995 .

[33]  Tim Loughran,et al.  The New Issues Puzzle , 1995 .

[34]  Christopher R. Blake,et al.  Survivorship Bias and Mutual Fund Performance , 1995 .

[35]  R. Haugen,et al.  Commonality in the Determinants of Expected Stock Returns , 1996 .

[36]  Owen A. Lamont.  Earnings and Expected Returns , 1996 .

[37]  S. Kothari,et al.  Book-to-Market, Dividend Yield, and Expected Market Returns: A Time-Series Analysis , 1997 .

[38]  Tyler Shumway.  The Delisting Bias in CRSP Data , 1997 .

[39]  E. Fama,et al.  Forecasting Profitability and Earnings , 1999 .

[40]  N. Barberis,et al.  A Model of Investor Sentiment , 1997 .

[41]  J. Stein,et al.  A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets , 1997 .

[42]  R. Green,et al.  Optimal Investment, Growth Options, and Security Returns , 1998 .

[43]  Christine Jolls.  Stock Repurchases and Incentive Compensation , 1998 .

[44]  R. Shiller,et al.  Valuation Ratios and the Long-Run Stock Market Outlook , 1998 .

[45]  Kent D. Daniel,et al.  Presentation Slides for 'Investor Psychology and Security Market Under and Overreactions' , 1998 .

[46]  Tuomo Vuolteenaho,et al.  Understanding the Aggregate Book-to-Market Ratio , 1999 .

[47]  Stephen E. Wilcox.  Investor Psychology and Security Market Under- and Overreactions , 1999 .

[48]  Stephen M. Horan.  Book-to-Market Ratios as Predictors of Market Returns , 1999 .

[49]  Profitability of Momentum Strategies: An Evaluation of Alternative Explanations , 1999 .

[50]  E. Fama,et al.  Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay? , 2000 .