Cashflow Risk, Systematic Earnings Revisions, and the Cross-Section of Stock Returns

Publication Type

Journal Article

Publication Date

12-2009

Abstract

The returns of stocks are partially driven by changes in their expected cashflow. Using revisions in analyst earnings forecasts, we construct an analyst earnings beta that measures the covariance between the cashflow innovations of an asset and those of the market. A higher analyst earnings beta implies greater sensitivity to marketwide revisions in expected cashflow, and therefore higher systematic risk. Our analyst earnings beta captures exposure to macroeconomic fluctuations and has a positive risk premium that provides a partial explanation for the value premium, size premium, and long-term return reversals. From 1984 to 2005, 55.1% of the return variation across book-to-market, size, and long-term return reversal portfolios is captured by their analyst earnings betas.

Keywords

Cashflow risk, Analyst forecast revisions

Discipline

Corporate Finance | Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Journal of Financial Economics

Volume

94

Issue

3

First Page

448

Last Page

468

ISSN

0304-405X

Identifier

10.1016/j.jfineco.2008.12.008

Publisher

Elsevier

External URL

http://dx.doi.org/10.1016/j.jfineco.2008.12.008

Additional URL

https://doi.org/10.1016/j.jfineco.2008.12.008

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