Western Finance Association 2013
52 Pages Posted: 2 Sep 2012 Last revised: 23 Apr 2015
Date Written: August 12, 2014
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: 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
By Lu Zhang