The profit to a standard short-term return reversal strategy can be decomposed analytically into four components: 1) across-industry return momentum, 2) withinindustry variation in expected returns, 3) under-reaction to within-industry cash flow news, and 4) a residual. Only the residual...

We find that consumption risk is lower in states that implement counter-cyclical fiscal policies. Moreover, firms whose investor base are concentrated in counter-cyclical states have lower stock returns, along with firms that relocate their headquarters to a counter-cyclical state. Therefore,...

According to the dynamic version of the Gordon growth model, the long-run expected return on stocks, stock yield, is the sum of the dividend yield on stocks plus some weighted average of expected future growth rates in dividends. We construct a measure of stock yield as a model-imposed affine...

The profit to a standard short-term return reversal strategy can be decomposed analytically into four components: 1) across-industry return momentum, 2) within-industry variation in expected returns, 3) under-reaction to within-industry cash flow news, and 4) a residual. Only the residual...

Stock returns unexplained by “fundamentals”, such as cash flow news, are more likely to reverse in the short run than those linked to fundamental news. Making novel use of analyst forecast revisions to measure cash flow news, a simple enhanced reversal strategy generates a risk-adjusted...

We test a frog-in-the-pan (FIP) hypothesis that predicts investors are inattentive to information arriving continuously in small amounts. Intuitively, we hypothesize that a series of frequent gradual changes attracts less attention than infrequent dramatic changes. Consistent with the FIP...

We argue that the CAPM may be a reasonable model for estimating the cost of capital for projects in spite of increasing empirical evidence in the literature against the CAPM based on stock returns. As McDonald and Siegel (1985) and Berk, Green and Naik (1999) point out, stocks are backed by...

We construct a monthly Presidential Economic Approval Rating (PEAR) index from 1981 to 2019, by averaging ratings on president’s handling of the economy across various national polls. In the cross-section, stocks with high betas to changes in the PEAR index significantly under-perform those...

The recent absence of a discernible liquidity premium in cross-sectional stock returns despite non-trivial trade execution costs is a puzzle. We resolve this puzzle using a proxy for institutional trading costs that exploits the unique institutional features of modern U.S. equity markets....

The profit to a standard short-term return reversal strategy can be decomposed analytically into four components related to (1) across-industry return momentum; (2) within-industry variation in expected returns; (3) underreaction to within-industry cash flow news; (4) and a residual. Only the...