Download This PaperFirm Characteristics and Stock Price Levels: A Long-Term Discount Rate Perspective
69 Pages Posted: 9 Apr 2020 Last revised: 12 Jul 2022
Date Written: April 10, 2020
Abstract
We study how firm characteristics are correlated with stock price levels by measuring the long-term discount rates (defined as the internal rate of return) of anomaly portfolios over a long horizon. Utilizing a simple novel non-parametric estimation methodology, which proxies ex-ante equity payout expectations with ex-post realizations, we reveal that the patterns of long-term discount rates are out-of-line with the average short-term holding period returns for multiple prominent anomalies. The set of stylized facts uncovered correspondingly shed new light on the mechanisms underlying various asset-pricing anomalies. Moreover, they indicate that long-term discount rates better characterize firms’ equity financing cost than short-term expected returns; with a representative example, we demonstrate how structural models that posit a tight connection between the two could imply counterfactual patterns in price levels.
Keywords: Asset Pricing Anomaly, Stock Price, Discount Rate
JEL Classification: G12
Suggested Citation: Suggested Citation
Ron Kaniel
University of Rochester - Simon Business School ( email )
Rochester, NY 14627
United States
HOME PAGE: http://rkaniel.simon.rochester.edu