Idiosyncratic Cash Flows and Systematic Risk
Arizona State University
Arizona State University (ASU) - Finance Department
Arizona State University (ASU)
August 12, 2014
Western Finance Association 2013
Forthcoming in the Journal of Finance
We show that unpriced cash flow shocks contain information about future priced risk. A positive idiosyncratic shock decreases the sensitivity of firm value to priced risk factors and simultaneously increases firm size and idiosyncratic risk. A simple model can therefore explain book-to-market and size anomalies, as well as the negative relation between idiosyncratic volatility and stock returns. Using the model, we identify firms for which anomalies must be stronger and confirm this relation empirically. More generally, our results imply that any economic variable correlated with the history of idiosyncratic shocks can help to explain expected stock returns.
Number of Pages in PDF File: 52
Date posted: September 2, 2012 ; Last revised: April 23, 2015
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