A New Measure of Equity Duration: The Duration-Based Explanation of the Value Premium Revisited

Abstract:     
This paper uses analyst forecasts to estimate a share's equity duration, a measure of a company's average cash-flow maturity. We find that short-duration equity is associated with high expected and realized returns, which cannot be attributed to the shares' systematic risk exposure as implied by the market beta. Instead, this paper shows that equity duration is a priced risk factor that is closely related to the Fama-French value indicator B/M ratio. The results suggest that the B/M ratio can be conceived as a simple proxy for a more fundamental cash-flow risk factor captured
by a firm's equity duration.

Number of Pages in PDF File: 28

Keywords: equity duration, value premium, analyst forecasts, B/M ratio, cash-flow maturity, implied cost of capital

JEL Classification: G12, M41

working papers series