Idiosyncratic Cash Flows and Systematic Risk

Research output: Contribution to journalArticle

14 Scopus citations

Abstract

We show that unpriced cash flow shocks contain information about future priced risk. A positive idiosyncratic shock decreases the sensitivity of firm value to priced risk factors and simultaneously increases firm size and idiosyncratic risk. A simple model can therefore explain book-to-market and size anomalies, as well as the negative relation between idiosyncratic volatility and stock returns. Empirically, we find that anomalies are more pronounced for firms with high idiosyncratic cash flow volatility. More generally, our results imply that any economic variable correlated with the history of idiosyncratic shocks can help to explain expected stock returns.

Original languageEnglish (US)
Pages (from-to)425-456
Number of pages32
JournalJournal of Finance
Volume71
Issue number1
DOIs
StatePublished - Feb 1 2016

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

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