Estimation Risk, Information, and the Conditional CAPM: Theory and Evidence

Posted: 11 Feb 2007

See all articles by Praveen Kumar

Praveen Kumar

University of Houston - Department of Finance

Sorin M. Sorescu

Texas A&M University - Department of Finance

Rodney D Boehme

Wichita State University - Department of Finance, Real Estate & Decision Sciences (FREDS)

Bartley R. Danielsen

North Carolina State University - Poole College of Management

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Abstract

We theoretically and empirically investigate the role of information on the cross-section of stock returns and firms' cost of capital when investors face estimation risk and learn from noisy signals of uncertain quality. The resultant equilibrium is an information-dependent conditional CAPM. We find strong empirical support for the model. Innovations in market volatility, oil prices, exchange rates, and dispersion of analysts' forecasts not only help explain the cross-section of stock returns, but their influence depends on the stock's systematic estimation risk. Moreover, dividend and share repurchase initiations have significant downward announcement effects on estimated betas and their standard errors.

Keywords: Estimation risk, Information quality, Conditional CAPM, Risk factors, Dividend initiations

JEL Classification: D83, D92, E22

Suggested Citation

Kumar, Praveen and Sorescu, Sorin M. and Boehme, Rodney D and Danielsen, Bartley R., Estimation Risk, Information, and the Conditional CAPM: Theory and Evidence. Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=961963

Praveen Kumar (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States
713-743-4770 (Phone)
713-743-4789 (Fax)

Sorin M. Sorescu

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States
979-458-0380 (Phone)

HOME PAGE: http://wehner.tamu.edu/finc.www/ssorescu/

Rodney D Boehme

Wichita State University - Department of Finance, Real Estate & Decision Sciences (FREDS) ( email )

Wichita, KS 67260-0078
United States

Bartley R. Danielsen

North Carolina State University - Poole College of Management ( email )

Hillsborough Street
Raleigh, NC 27695-8614
United States
919-513-3003 (Phone)

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