Working Paper: NBER ID: w22520
Authors: Michael Weber
Abstract: The term structure of equity returns is downward-sloping: stocks with high cash flow duration earn 1.10% per month lower returns than short-duration stocks in the cross section. I create a measure of cash flow duration at the firm level using balance sheet data to show this novel fact. Factor models can explain only 50% of the return differential, and the difference in returns is three times larger after periods of high investor sentiment. I use institutional ownership as a proxy for short-sale constraints, and find the negative cross-sectional relationship between cash flow duration and returns is only contained within short-sale constrained stocks.
Keywords: cash flow duration; equity returns; term structure; investor sentiment; short-sale constraints
JEL Codes: E43; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cash flow duration (C41) | equity returns (G12) |
| investor sentiment (G41) | equity returns (G12) |
| institutional ownership (G32) | equity returns (G12) |