TY  - JOUR
AU  - Hecht,Peter
AU  - Vuolteenaho,Tuomo
TI  - Explaining Returns with Cash-Flow Proxies
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11169
PY  - 2005
Y2  - March 2005
UR  - http://www.nber.org/papers/w11169
L1  - http://www.nber.org/papers/w11169.pdf
N1  - Author contact info:
Peter Hecht
Harvard Business School
Morgan Hall 383
Boston, MA 02163
Tel: 617/495-6171
Fax: 617/496-7357
E-Mail: phecht@hbs.edu

Tuomo Vuolteenaho
Arrowstreet Capital
200 Clarendon Street #30
Boston, MA 02116-5021
Tel: 617/496-6284
Fax: 617/495-8570
E-Mail: tvuolteenaho@arrowstreetcapital.com
AB  - Stock returns are correlated with contemporaneous earnings growth, dividend growth, future real activity, and other cash-flow proxies. The correlation between cash-flow proxies and stock returns may arise from association of cash-flow proxies with one-period expected returns, cash-flow news, and/or expected-return news. We use Campbell's (1991) return decomposition to measure the relative importance of these three effects in regressions of returns on cash-flow proxies. In some of the popular specifications, variables that are motivated as proxies for cash-flow news also track a nontrivial proportion of one-period expected returns and expected-return news. As a result, the R2 from a regression of returns on cash-flow proxies may overstate or understate the importance of cash-flow news as a source of return variance.
ER  -