Long-Term Discount Rates Do Not Vary Across Firms
43 Pages Posted: 27 Feb 2018 Last revised: 27 May 2018
Date Written: April 22, 2018
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 (2005) in which firms' risks change over time. Our results imply that 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: Suggested Citation