The Leading Premium
61 Pages Posted: 20 Nov 2015 Last revised: 18 Oct 2021
Date Written: Nov 1, 2016
In this paper, we compute conditional measures of lead-lag relationships between GDP growth and industry-level cash-flow growth in the US. Our results show that firms in leading industries pay an average annualized return 4\% higher than that of firms in lagging industries. Using both time series and cross sectional tests, we estimate an annual timing premium ranging from 1.5% to 2%. This finding can be rationalized in a model in which (a) agents price growth news shocks, and (b) leading industries provide valuable resolution of uncertainty about the growth prospects of lagging industries.
JEL Classification: G12, E32, E44
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