Cash Flow Timing and Displacement Risk

Type Dissertation Project

Funding Bodies
  • Austrian Science Fund

Duration Feb. 1, 2020 - Feb. 25, 2021

  • Institute for Financial Research IN (Details)


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Abstract (English)

Stocks with cash flows to shareholders in the near future tend to be associated with significantly higher expected returns relative to stocks which have a longer cash flow maturity. We find that these differences in expected returns are not only present in the cross-section of U.S. stocks but also in the cross-section of industry portfolios. Moreover, we hypothesize that stocks and industries with a low equity duration might be at the end of their life cycle, where cash flow growth and innovativeness is declining. Therefore, low duration firms might earn higher expected returns because they might be exposed to the risk of being displaced by innovative firms with disruptive business models. We find that the cross-sectional differences in expected returns between high and low equity duration stocks are concentrated in industries where IPO activity, the degree of innovation and financial constraints are high.