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A New Measure of Equity and Cash Flow Duration: The Duration‐Based Explanation of the Value Premium Revisited

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  • DAVID SCHRÖDER
  • FLORIAN ESTERER

Abstract

This article reexamines the duration‐based explanation of the value premium using novel estimates of the firms' equity and cash flow durations based on analyst forecasts. We show that the value premium can be explained by cross‐sectional differences in the shares' equity durations, but not by their cash flow durations. Different from the duration‐based explanation of the value premium that explains the value premium with cross‐sectional differences in the firm's cash flow timing, we find that short‐horizon stocks have lower (expected) returns than long‐horizon stocks. This result is consistent with an upward‐sloping equity yield curve.

Suggested Citation

  • David Schröder & Florian Esterer, 2016. "A New Measure of Equity and Cash Flow Duration: The Duration‐Based Explanation of the Value Premium Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(5), pages 857-900, August.
    • Handle: RePEc:wly:jmoncb:v:48:y:2016:i:5:p:857-900
    DOI: 10.1111/jmcb.12320
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