Review of Financial Studies Vol. 19 No. 1 2006
Explaining Returns with Cash-Flow Proxies
Abstract
Stock returns are correlated with contemporaneous earnings growth, dividend growth, future real activity, and other cash-flow proxies. The correlation between cash-flow proxies and stock returns may arise from association of cash-flow proxies with one-period expected returns, cash-flow news, and/or expected-return news. We use Campbell's (1991) return decomposition to measure the relative importance of these three effects in regressions of returns on cash-flow proxies. In some of the popular specifications, variables that are motivated as proxies for cash-flow news also track a nontrivial proportion of one-period expected returns and expected-return news. As a result, the R-super-2 from a regression of returns on cash-flow proxies may overstate or understate the importance of cash-flow news as a source of return variance.
- DOI
- 10.1093/rfs/hhj001
- Volume
- 19
- Issue
- 1
- Pages
- 159-194
- Language
- en
- Sources
- crossref openalex