Long-Term Discount Rates Do Not Vary Across Firms

50 Pages Posted: 27 Feb 2018 Last revised: 14 Feb 2019

See all articles by Matti Keloharju

Matti Keloharju

Aalto University School of Business; Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)

Juhani T. Linnainmaa

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Peter M. Nyberg

Aalto University

Multiple version iconThere are 2 versions of this paper

Date Written: February 12, 2019

Abstract

Long-term expected returns appear to vary little, if at all, in the cross section of stocks. We devise a bootstrapping procedure that injects small amounts of variation into expected returns and show that even negligible differences in expected returns, if they existed, would be easy to detect. Markers of such differences, however, are absent from actual stock returns. Our estimates are consistent with production-based asset pricing models such as Berk, Green, and Naik (1999) and Gomes, Kogan, and Zhang (2003) in which firms’ risks change over time. We show that long-term reversals in stock returns are the consequence of the rapid convergence in expected returns. Our results imply stock market anomalies have only a limited effect on firm valuations.

Keywords: Factors, return predictability, market efficiency, production-based asset pricing models, time-varying risks

JEL Classification: G12

Suggested Citation

Keloharju, Matti and Linnainmaa, Juhani T. and Nyberg, Peter Mikael, Long-Term Discount Rates Do Not Vary Across Firms (February 12, 2019). Available at SSRN: https://ssrn.com/abstract=3125502 or http://dx.doi.org/10.2139/ssrn.3125502

Matti Keloharju

Aalto University School of Business ( email )

P.O. Box 21210
AALTO, FI-00076
Finland

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Juhani T. Linnainmaa (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

HOME PAGE: http://www.tuck.dartmouth.edu/faculty/faculty-directory/juhani-linnainmaa

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter Mikael Nyberg

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

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