Explaining Returns with Cash-Flow Proxies

Posted: 29 Feb 2008

See all articles by Peter Andrew Hecht

Peter Andrew Hecht

Harvard Business School

Tuomo Vuolteenaho

Arrowstreet Capital, LP; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: 2006


Stock returns are correlated with contemporaneous earnings growth, dividend growth, future real activity, and other cash-flow proxies. The correlation between cash-flow proxies and stock returns may arise from association of cash-flow proxies with one-period expected returns, cash-flow news, and/or expected-return news. We use Campbell`s (1991) return decomposition to measure the relative importance of these three effects in regressions of returns on cash-flow proxies. In some of the popular specifications, variables that are motivated as proxies for cash-flow news also track a nontrivial proportion of one-period expected returns and expected-return news. As a result, the R from a regression of returns on cash-flow proxies may overstate or understate the importance of cash-flow news as a source of return variance. 2

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Suggested Citation

Hecht, Peter Andrew and Vuolteenaho, Tuomo, Explaining Returns with Cash-Flow Proxies ( 2006). The Review of Financial Studies, Vol. 19, Issue 1, pp. 159-194, 2006, Available at SSRN: https://ssrn.com/abstract=900706

Peter Andrew Hecht (Contact Author)

Harvard Business School ( email )

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United States
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(617) 496-7357 (Fax)

Tuomo Vuolteenaho

Arrowstreet Capital, LP ( email )

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Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

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