Conference Agenda

Session
AP 05: Stock Price Drivers
Time:
Thursday, 17/Aug/2023:
10:30am - 12:00pm

Session Chair: Jules H. van Binsbergen, The University of Pennsylvania
Location: Auditorium (floor 1)


Presentations
ID: 1271

Dogs and cats living together: A defense of cash-flow predictability

Seth Pruitt

Arizona State University, United States of America

Discussant: Martijn Boons (Tilburg University)

Present-value logic says that aggregate stock prices are driven by discount-rate and cash-flow expectations. Dividends and net repurchases are both cash flows between the firm and household sectors. Aggregate dividend-price ratios do not forecast dividend growth, but do robustly forecast future buybacks and issuance. Long-run variance decompositions say that discount-rate and cash-flow expectations contribute equally to aggregate dividend-price-ratio variation.

EFA2023_1271_AP 05_1_Dogs and cats living together.pdf


ID: 1832

The Optimal Stock Valuation Ratio

Sebastian Hillenbrand1, Odhrain McCarthy2

1Harvard Business School; 2New York University

Discussant: Riccardo Sabbatucci (Stockholm School of Economics)

Stock valuation ratios contain expectations of returns, yet, their performance in predicting returns has been rather dismal. This is because of an omitted variable problem: valuation ratios also contain expectations of cash flow growth. Time-variation in cash flow volatility and a structural shift toward repurchases have magnified this omitted variable problem. We show theoretically and empirically that scaling prices by forward measures of cash flows can overcome this problem yielding optimal return predictors. We construct a new measure of the forward price-to-earnings ratio for the S&P index based on earnings forecasts using machine learning techniques. The out-of-sample explanatory power for predicting one-year aggregate returns with our forward price-to-earnings ratio ranges from 7% to 11%, thereby beating all other predictors and helping to resolve the out-of-sample predictability debate (Goyal and Welch, 2008).

EFA2023_1832_AP 05_2_The Optimal Stock Valuation Ratio.pdf


ID: 368

Government Policy Announcement Return

Yang LIU1, Ivan Shaliastovich2

1University of Hong Kong, Hong Kong S.A.R. (China); 2University of Wisconsin Madison

Discussant: Marco Grotteria (London Business School)

We argue that State of the Union (SOTU) addresses by the U.S. President function as announcements about broad government policies related to upcoming legislative activity of the administration. Unlike traditional macroeconomic and monetary policy announcements, SOTU addresses go back to the 1930s, which allows to expand the sample and context for the announcement effects for financial markets. We find that stock market returns on SOTU days are about ten times larger than on other days, are less volatile, and show strong pre-announcement drift prior to the address. SOTU returns increase in adverse economic, political and high volatility times, more so than on other announcement days. The overall evidence supports the risk premium/uncertainty resolution channel for announcement effects.

EFA2023_368_AP 05_3_Government Policy Announcement Return.pdf