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Appears in Collections:Accounting and Finance Journal Articles
Peer Review Status: Refereed
Title: Predicting Firm Level Stock Returns: Implications for Asset Pricing and Economic Links
Author(s): McMillan, David
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Keywords: Stock Returns
Asset Pricing
Issue Date: 15-Apr-2019
Citation: McMillan D (2019) Predicting Firm Level Stock Returns: Implications for Asset Pricing and Economic Links. British Accounting Review.
Abstract: We examine the predictive ability of stock price ratios, stock return dispersion and distribution measures for firm level returns. Analysis typically focusses on market level returns, however, for the underlying asset pricing model to hold, firm-level predictability should be present. Additionally, we examine the economic content of predictability by considering whether the predictive coefficient has the theoretically correct sign and whether it is related to future output growth. While stock returns reflect investor expectations regarding future economic conditions, they are often too noisy to act as predictor. We use the time-varying predictive coefficient as it reflects investor confidence in the predictive relation. Results suggest that a subset of stock price ratios have predictive power for individual firm stock returns, exhibit the correct coefficient sign and has predictive power for output growth. Each of these ratios has a measure of fundamentals divided by the stock price and has a positive relation with stock returns and output growth. This implies that as investors expect future economic conditions to improve and earnings and dividends to rise, so expected stock returns will increase. This supports the cash flow channel as the avenue through which stock return predictability arises.
DOI Link: 10.1016/
Rights: [ReasonForEmbargoRequest] Until this work is published there will be an embargo on the full text of this work. Publisher requires embargo of 24 months after formal publication.
Notes: Output Status: Forthcoming/Available Online

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