Firm Characteristics and Stock Price Levels: A Long-Term Discount Rate Perspective

54 Pages Posted: 28 Jun 2021

See all articles by Yixin Chen

Yixin Chen

University of Rochester - Simon Business School

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Date Written: June 16, 2021

Abstract

We study how firm characteristics are correlated with stock price levels by measuring the long-term discount rates (defined as the internal rate of return) of anomaly portfolios over a long horizon. We develop a simple, non-parametric methodology to estimate the long-term equity discount rate from ex-post realized payouts and prices. Our estimates show that the cross-sectional patterns in the long-term discount rates can be substantially different from that of the average short-term holding period returns; and appealing to mean-reversion in anomaly premia does not reconcile the wedge between the two for a group of prominent anomalies. We argue that the long-term discount rate is a better measure of firm's equity financing cost than the premium from a dynamically-rebalanced trading strategy; and we demonstrate with a representative example that structural models that interpret the spreads in the latter as the differences in the former could generate counterfactual patterns in the long-term discount rates. Our empirical exercise uncovers numerous new stylized facts regarding firms' equity financing cost; and these findings could shed new light on the mechanisms underlying various asset pricing anomalies, and advance our understanding about the determinants of stock price levels.

Keywords: Stock Price Level, Discount Rate, Asset Pricing Anomaly

JEL Classification: G12, G31

Suggested Citation

Chen, Yixin and Kaniel, Ron, Firm Characteristics and Stock Price Levels: A Long-Term Discount Rate Perspective (June 16, 2021). Available at SSRN: https://ssrn.com/abstract=3868318 or http://dx.doi.org/10.2139/ssrn.3868318

Yixin Chen (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Ron Kaniel

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

London
United Kingdom

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