The return of return dominance: Decomposing the cross-section of prices

• 成果类型: Article
• 署名作者: Delao, Ricardo; Han, Xiao; Myers, Sean
• 署名单位: University of Southern California; City St Georges, University of London; University of Pennsylvania
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/j.jfineco.2025.104059
• 发表日期: 2025
• 关键词: price dispersion; Return predictability; Earnings growth; VALUE PREMIUM; Cross-sectional models

摘要

What explains cross-sectional dispersion in stock valuation ratios? We find that 75% of dispersion in price-earnings ratios is reflected in differences in future returns, while only 25% is reflected in differences in future earnings growth. This holds at both the portfolio-level and the firm-level. We reconcile these conclusions with previous literature which has found a strong relation between prices and future profitability. Our results support models in which the cross-section of price-earnings ratios is driven mainly by discount rates or mispricing rather than future earnings growth. Evaluating six models of the value premium, we find that most models struggle to match our results; however, models with long-lived differences in risk exposure or gradual learning about parameters perform the best. The lack of earnings growth differences at long horizons provides new evidence in favor of long-run return predictability. We also show a similar dominance of predicted returns for explaining the dispersion in return surprises.