Skip Navigation



RFS Advance Access published online on October 28, 2005
Review of Financial Studies, doi:10.1093/rfs/hhj001
This Article
Right arrow Advance Access manuscript (PDF)
Right arrow All Versions of this Article:
19/1/159    most recent
hhj001v1
Right arrow Alert me when this article is cited
Right arrow Alert me if a correction is posted
Services
Right arrow Email this article to a friend
Right arrow Similar articles in this journal
Right arrow Alert me to new issues of the journal
Right arrow Add to My Personal Archive
Right arrow Download to citation manager
Right arrowRequest Permissions
Google Scholar
Right arrow Articles by Hecht, P.
Right arrow Articles by Vuolteenaho, T.
Right arrow Search for Related Content
Social Bookmarking
Add to CiteULike   Add to Connotea   Add to Del.icio.us  
What's this?

© The Author 2005. Published by Oxford University Press on behalf of the by The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.
Received October 15, 1996
Accepted December 28, 2004

Article

Explaining Returns with Cash-Flow Proxies*

Peter Hecht 1 and Tuomo Vuolteenaho 2*
1 Harvard Business School, Boston, MA 02163, USA
2 Arrowstreet Capital, L.P., 44 Brattle Street 5th Floor, Cambridge, MA 02138

* To whom correspondence should be addressed.
Tuomo Vuolteenaho, E-mail: tvuolteenaho{at}arrowstreetcapital.com


  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 expectedreturn 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 R2 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.

Keywords: stock returns, aggregate dividends, capital markets, expected-return variation, earnings-response coefficient, volatility, value relevance.
* Earlier drafts of this paper were circulated under the titles "Stock return variation and expected dividends: a reinterpretation" and "Stock return variation and expected dividends: a comment."
Add to CiteULike CiteULike   Add to Connotea Connotea   Add to Del.icio.us Del.icio.us    What's this?




Disclaimer:
Please note that abstracts for content published before 1996 were created through digital scanning and may therefore not exactly replicate the text of the original print issues. All efforts have been made to ensure accuracy, but the Publisher will not be held responsible for any remaining inaccuracies. If you require any further clarification, please contact our Customer Services Department.