Working Paper: NBER ID: w11389
Authors: John Y. Campbell; Christopher Polk; Tuomo Vuolteenaho
Abstract: The cash flows of growth stocks are particularly sensitive to temporary movements in aggregate stock prices (driven by movements in the equity risk premium), while the cash flows of value stocks are particularly sensitive to permanent movements in aggregate stock prices (driven by market-wide shocks to cash flows.) Thus the high betas of growth stocks with the market's discount-rate shocks, and of value stocks with the market's cash-flow shocks, are determined by the cash-flow fundamentals of growth and value companies. Growth stocks are not merely "glamour stocks" whose systematic risks are purely driven by investor sentiment. More generally, accounting measures of firm-level risk have predictive power for firms' betas with market-wide cash flows, and this predictive power arises from the behavior of firms' cash flows. The systematic risks of stocks with similar accounting characteristics are primarily driven by the systematic risks of their fundamentals.
Keywords: Growth Stocks; Value Stocks; Systematic Risk; Cash Flow; Discount Rates
JEL Codes: G12; G14; N22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cash flow characteristics (G32) | systematic risks of value stocks (G12) |
| cash flow characteristics (G32) | systematic risks of growth stocks (G17) |
| market-wide cash flow news (G14) | cash flow news for value stocks (G32) |
| market-wide cash flow news (G14) | cash flow news for growth stocks (O16) |
| market discount rate news (E43) | profitability of growth stocks (O44) |
| market cash flow news (G14) | profitability of value stocks (D46) |
| accounting profitability (return on equity) of value stocks (G32) | systematic risks of value stocks (G12) |
| accounting profitability (return on equity) of growth stocks (O40) | systematic risks of growth stocks (G17) |