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Estimation Risk, Information, and the Conditional CAPM: Theory and Evidence

We theoretically and empirically investigate the role of information on the cross section of stock returns and firms' cost of capital when investors face estimation risk and learn from noisy signals of uncertain quality. The resultant equilibrium is an information-dependent conditional CAPM. We...

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Published in:	The Review of financial studies 2008-05, Vol.21 (3), p.1037-1075
Main Authors:	Kumar, Praveen, Sorescu, Sorin M., Boehme, Rodney D., Danielsen, Bartley R.
Format:	Article
Language:	English
Subjects:	Capital assets Capital costs CAPM Dividends Equilibrium Financial economics Financial information Financial models Financial portfolios Financial risk Foreign exchange rates Investment decision Investment risk Investments Investors Macroeconomics Modeling Oil prices Prices Rates of return Return on investment Risk Risk factors Risk premiums Stock prices Stock returns Stocks Studies Systematic risk Volatility
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container_title	The Review of financial studies
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description	We theoretically and empirically investigate the role of information on the cross section of stock returns and firms' cost of capital when investors face estimation risk and learn from noisy signals of uncertain quality. The resultant equilibrium is an information-dependent conditional CAPM. We find strong empirical support for the model. Innovations in market volatility, oil prices, exchange rates, and dispersion of analysts' forecasts not only help explain the cross section of stock returns, but their influence depends on the stock's systematic estimation risk. Moreover, dividend and share repurchase initiations have significant downward announcement effects on estimated betas and their standard errors.
doi_str_mv	10.1093/rfs/hhn016
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source	EBSCOhost Business Source Ultimate; International Bibliography of the Social Sciences (IBSS); EBSCOhost Econlit with Full Text; JSTOR Archival Journals and Primary Sources Collection; Oxford Journals Online
subjects	Capital assets Capital costs CAPM Dividends Equilibrium Financial economics Financial information Financial models Financial portfolios Financial risk Foreign exchange rates Investment decision Investment risk Investments Investors Macroeconomics Modeling Oil prices Prices Rates of return Return on investment Risk Risk factors Risk premiums Stock prices Stock returns Stocks Studies Systematic risk Volatility
title	Estimation Risk, Information, and the Conditional CAPM: Theory and Evidence
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