Equity Capital: A Puzzle?

41 Pages Posted: 8 Nov 2006

See all articles by Amir Yaron

Amir Yaron

University of Pennsylvania -- Wharton School of Business; National Bureau of Economic Research (NBER)

Ravi Bansal

Duke University and NBER

Ed Fang

affiliation not provided to SSRN

Abstract

In almost any equilibrium model, shifts in sectoral wealth have direct implications for asset returns so as to induce investors to hold more or less of their wealth in the sector. For an expanding sector, these inducements can be in the form of higher mean or lower volatility of asset. In this paper, we document that shifts in sectoral financial wealth have virtually no bearing on the subsequent mean and volatility of sectoral returns. About 90% of the wealth share fluctuations are due to movements in net payouts and 10% due to changes in expected returns. Our evidence is that sectoral wealth and asset returns show no relation|this leads to the equity capital puzzle. Why then are investors willing to hold more (less) wealth share of an expanding (contracting) sector?

Suggested Citation

Yaron, Amir and Bansal, Ravi and Fang, Ed, Equity Capital: A Puzzle?. Sixteenth Annual Utah Winter Finance Conference. Available at SSRN: https://ssrn.com/abstract=941755 or http://dx.doi.org/10.2139/ssrn.941755

Amir Yaron (Contact Author)

University of Pennsylvania -- Wharton School of Business ( email )

The Wharton School
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National Bureau of Economic Research (NBER) ( email )

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Ravi Bansal

Duke University and NBER ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7758 (Phone)
919-660-8038 (Fax)

Ed Fang

affiliation not provided to SSRN ( email )

No Address Available

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