What Drives Firm-Level Stock Returns?

44 Pages Posted: 20 Apr 2001 Last revised: 9 Jul 2022

See all articles by Tuomo Vuolteenaho

Tuomo Vuolteenaho

Arrowstreet Capital, LP; National Bureau of Economic Research (NBER)

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Date Written: April 2001


I use a vector autoregressive model (VAR) to decompose an individual firm's stock return into two components: changes in cash-flow expectations (i.e., cash-flow news) and changes in discount rates (i.e., expected-return news). The VAR yields three main results. First, firm-level stock returns are mainly driven by cash-flow news. For a typical stock, the variance of cash-flow news is more than twice that of expected-return news. Second, shocks to expected returns and cash flows are positively correlated for a typical small stock. Third, expected-return-news series are highly correlated across firms, while cash-flow news can largely be diversified away in aggregate portfolios.

Suggested Citation

Vuolteenaho, Tuomo, What Drives Firm-Level Stock Returns? (April 2001). NBER Working Paper No. w8240, Available at SSRN: https://ssrn.com/abstract=267424

Tuomo Vuolteenaho (Contact Author)

Arrowstreet Capital, LP ( email )

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National Bureau of Economic Research (NBER)

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