Cash Flow Duration and the Term Structure of Equity Returns

58 Pages Posted: 7 Aug 2016

See all articles by Michael Weber

Michael Weber

University of Chicago - Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: August 5, 2016

Abstract

The term structure of equity returns is downward-sloping: stocks with high cash flow duration earn 1.10% per month lower returns than short-duration stocks in the cross section. I create a measure of cash flow duration at the firm level using balance sheet data to show this novel fact. Factor models can explain only 50% of the return differential, and the difference in returns is three times larger after periods of high investor sentiment. I use institutional ownership as a proxy for short-sale constraints, and find the negative cross-sectional relationship between cash flow duration and returns is only contained within short-sale constrained stocks.

Suggested Citation

Weber, Michael, Cash Flow Duration and the Term Structure of Equity Returns (August 5, 2016). Becker Friedman Institute for Research in Economics Working Paper No. 2016-21, Available at SSRN: https://ssrn.com/abstract=2819206

Michael Weber (Contact Author)

University of Chicago - Finance ( email )

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United States

National Bureau of Economic Research (NBER)

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