Accounting Papers

Document Type

Journal Article

Date of this Version

2013

Publication Source

The Review of Financial Studies

Volume

26

Issue

1

Start Page

158

Last Page

207

DOI

10.1093/rfs/hhs102

Abstract

Firm-specific information can affect expected returns if it affects investor uncertainty about risk-factor loadings. We show that a stock's expected return is decreasing in factor-loading uncertainty, controlling for the average level of its factor loading. When loadings are persistent, learning by investors can induce time-series variation in price-dividend ratios, expected returns, and idiosyncratic volatility, even when the aggregate risk-premium is constant and fundamental shocks are homoscedastic. Consistent with our predictions, we estimate that average annual returns of a firm with the median level of factor-loading uncertainty are 400 to 525 basis points lower than a comparable firm without factor-loading uncertainty.

Copyright/Permission Statement

This is a pre-copyedited, author-produced PDF of an article accepted for publication in Review of Financial Studies following peer review. The version of record is available online at: http://dx.doi....93/rfs/hhs102

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Date Posted: 27 November 2017

This document has been peer reviewed.