Cash-flow Driven Covariation
|Speaker:||Miguel Anton, IESE Business School, University of Navarra|
|Date:||Friday 16 March 2012|
|Location:||Streatham Court 0.28|
This paper studies the sources of change in the systematic risks of stocks added to the S&P 500 index. Firstly, using vector autoregressions (VARs) and a two-beta decomposition, I measure the different components of beta before and after the addition. I find that I cannot reject the hypothesis that all of the well-known change in beta comes from the cash-flow news component of a firm’s return. Secondly, I study fundamentals of included firms directly to reduce any concerns that the VAR-based results are sensitive to my particular specification. This analysis confirms that post inclusion, the profitability of a company added to the index varies significantly more with the profitability of the S&P 500. As ownership structure cannot directly influence fundamentals, these results challenge previous findings, as they are consistent with the change in beta being due to a selection effect.