Becker Friedman Institute

Research Repository

Research. Insights. Impact. Advancing the Legacy of Chicago Economics.

Cash Flow Duration and the Term Structure of Equity Returns

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.

Authors: 
Michael Weber, University of Chicago Booth School of Business
Publication Date: 
August, 2016
Publication Type: 
Institution: 
SSRN
Series: 
Becker Friedman Institute Working Paper Series
Document Number: 
21