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Cashflows, earnings, and timevarying expected stock returns

Cashflows, earnings, and timevarying expected stock returns Purpose The objective of this paper is to empirically evaluate alternative multifactor explanations of cashflows and earnings momentum portfolios. It aims to examine whether the common risk factors, which are related to firm level accounting characteristics, can reflect the behavior of average portfolio returns based on such measures as cashflows and earnings momentum in the presence of each other's systematic components and timevarying measures of volatility.Designmethodologyapproach The paper uses monthly stock returns for all NYSE firms on CRSP database and constructs average portfolio returns between July 1951 and June 2008. It investigates the interdependence of stock returns for cashflows and earnings momentum portfolios using their systematic components. The methodology is implemented by extending various characteristicbased factor models of returns.Findings The main finding of the study suggests that there is strong information transmission both in the temporal variation and risk sensitivities of the average returns of cashflows and earnings momentum portfolios. Also, there is compelling empirical evidence that the associated systematic components well complement the ability of common risk factors to explain the temporal behavior of all NYSE stocks.Research limitationsimplications While the results are statistically significant, the effect of aggregate risk in factor model is dubious. An integration of other accruals based accounting characteristics would be an interesting issue to explore.Practical implications The goal of the paper is to examine how different combinations of empirically determined variables that are instrumental in the creation of stylespecific benchmarks can capture the timeseries variation of average portfolio returns. It will provide added value to scholars and investment professionals in making effective portfolio management decisions.Originalityvalue Compared to the existing literature, in the evaluation of earnings and cashflows based measures, the paper focuses on the predictive power of the systematic components. It shows that paying close attention to the systematic components clearly provides additional information about the timevarying behavior of average stock returns. The findings that the economic characteristics of the firm can complement the comparative role of the systematic components of cashflows and earnings add significantly to the literature. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic and Administrative Sciences Emerald Publishing

Cashflows, earnings, and timevarying expected stock returns

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1026-4116
DOI
10.1108/10264111311319222
Publisher site
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Abstract

Purpose The objective of this paper is to empirically evaluate alternative multifactor explanations of cashflows and earnings momentum portfolios. It aims to examine whether the common risk factors, which are related to firm level accounting characteristics, can reflect the behavior of average portfolio returns based on such measures as cashflows and earnings momentum in the presence of each other's systematic components and timevarying measures of volatility.Designmethodologyapproach The paper uses monthly stock returns for all NYSE firms on CRSP database and constructs average portfolio returns between July 1951 and June 2008. It investigates the interdependence of stock returns for cashflows and earnings momentum portfolios using their systematic components. The methodology is implemented by extending various characteristicbased factor models of returns.Findings The main finding of the study suggests that there is strong information transmission both in the temporal variation and risk sensitivities of the average returns of cashflows and earnings momentum portfolios. Also, there is compelling empirical evidence that the associated systematic components well complement the ability of common risk factors to explain the temporal behavior of all NYSE stocks.Research limitationsimplications While the results are statistically significant, the effect of aggregate risk in factor model is dubious. An integration of other accruals based accounting characteristics would be an interesting issue to explore.Practical implications The goal of the paper is to examine how different combinations of empirically determined variables that are instrumental in the creation of stylespecific benchmarks can capture the timeseries variation of average portfolio returns. It will provide added value to scholars and investment professionals in making effective portfolio management decisions.Originalityvalue Compared to the existing literature, in the evaluation of earnings and cashflows based measures, the paper focuses on the predictive power of the systematic components. It shows that paying close attention to the systematic components clearly provides additional information about the timevarying behavior of average stock returns. The findings that the economic characteristics of the firm can complement the comparative role of the systematic components of cashflows and earnings add significantly to the literature.

Journal

Journal of Economic and Administrative SciencesEmerald Publishing

Published: May 10, 2013

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