Explaining returns with cash-flow proxies
By: Peter Hecht and Tuomo Vuolteenaho
Contributors: Vuolteenaho, Tuomo; Harvard Business School. Division of Research
Series: Working paper / Division of Research, Harvard Business School -- 03-043; Working paper (Harvard Business School. Division of Research) -- 03-043
Publisher: Division of Research, Harvard Business School
Published: 2003
Place of publication: Boston]
Language: eng
Number of pages: 27
Description: 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. We use Campbell's (1991) return decomposition to measure the relative importance of these three effects in regressions of returns on cash-flow news also track a nontrivial proportion of one-period expected returns and expected-return news. As a result, the R2 from a regression of returns on cash-flow proxies may overstate or understate that importance of cash-flow news as a source of return variance.
Notes: "Draft date: August 15, 2002."

Includes bibliographical references.