Cash Flow Duration and the Term Structure of Equity Returns

58 Pages Posted: 22 Aug 2016 Last revised: 15 Jul 2023

See all articles by Michael Weber

Michael Weber

University of Chicago - Finance; National Bureau of Economic Research (NBER)

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Date Written: August 2016

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.

Suggested Citation

Weber, Michael, Cash Flow Duration and the Term Structure of Equity Returns (August 2016). NBER Working Paper No. w22520, Available at SSRN: https://ssrn.com/abstract=2827438

Michael Weber (Contact Author)

University of Chicago - Finance ( email )

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National Bureau of Economic Research (NBER)

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