We study the dynamics of the short-duration premium around pre-scheduled news announcements. For macroeconomic news, long-duration stocks earn higher returns than short-duration stocks. On the flip side, returns for short-duration stocks are significantly elevated on earnings announcement days. Focusing on earnings announcement as a laboratory for the pricing of firm-specific news, we differentiate between four competing explanations. We find strong support for the idea that investors are overly optimistic about long-term cash-flows, leading to an overvaluation of long-duration stocks. This overvaluation is in part corrected at earnings announcements, explaining the lower return response of long- compared to short-duration stocks. We also present empirical evidence against the three competing explanations, and show that the effect is not present in the corporate bond market.

We introduce a new proxy for the health of financial intermediaries-the Leverage Bearing Capacity (LBC). LBC is the leverage of a fictitious intermediary that targets a fixed level of risk and rebalances its capital structure on an ongoing basis. Our measure is based on market values, incorporates off-balance sheet activities, is available at any frequency, and inherently captures higher-order risks. We analyze the dynamics of LBC in event studies and demonstrate that it is closely linked to financial sector uncertainty. Building on an intermediary asset pricing model, we validate that LBC proxies the marginal wealth of intermediaries. Empirically, it explains the expected returns across several asset classes and subsumes the explanatory power of existing measures of intermediaries’ health, financial uncertainty, higher-order risks, and common risk factors.