Idiosyncratic Cash Flows and Systematic Risk

Western Finance Association 2013

Forthcoming in the Journal of Finance

52 Pages Posted: 2 Sep 2012 Last revised: 23 Apr 2015

Ilona Babenko

Arizona State University

Oliver Boguth

Arizona State University (ASU) - Finance Department

Yuri Tserlukevich

Arizona State University (ASU)

Date Written: August 12, 2014

Abstract

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.

Suggested Citation

Babenko, Ilona and Boguth, Oliver and Tserlukevich, Yuri, Idiosyncratic Cash Flows and Systematic Risk (August 12, 2014). Western Finance Association 2013; Forthcoming in the Journal of Finance. Available at SSRN: https://ssrn.com/abstract=2139735 or http://dx.doi.org/10.2139/ssrn.2139735

Ilona Babenko

Arizona State University ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

Oliver Boguth

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Yuri Tserlukevich (Contact Author)

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

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