The Journal of Finance

Earnings and Expected Returns

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00065

Owen Lamont

The aggregate dividend payout ratio forecasts excess returns on both stocks and corporate bonds in postwar U.S. data. High dividends forecast high returns. High earnings forecast low returns. The correlation of earnings with business conditions gives them predictive power for returns; they contain information about future returns that is not captured by other variables. Dividends and earnings contribute substantial explanatory power at short horizons. For forecasting long‐horizon returns, however, only (scaled) stock prices matter. Forecasts of low long‐horizon stock returns in the mid‐1990s are caused not by earnings or dividends, but by high stock prices.

Cash Flow and Investment: Evidence from Internal Capital Markets

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb03809.x

OWEN LAMONT

Using data from the 1986 oil price decrease, I examine the capital expenditures of nonoil subsidiaries of oil companies. I test the joint hypothesis that 1) a decrease in cash/collateral decreases investment, holding fixed the profitability of investment, and 2) the finance costs of different parts of the same corporation are interdependent. The results support this joint hypothesis: oil companies significantly reduced their nonoil investment compared to the median industry investment. The 1986 decline in investment was concentrated in nonoil units that were subsidized by the rest of the company in 1985.

Investment Plans and Stock Returns

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00304

Owen A. Lamont

When the discount rate falls, investment should rise. Thus with time‐varying discount rates and instantly changing investment, investment should positively covary with current stock returns and negatively covary with future stock returns. Aggregate nonresidential U.S. investment contradicts both these implications, probably because of investment lags. Investment plans, however, satisfy both implications. These investment plans, from a U.S. government survey of firms, are highly informative measures of expected investment and explain more than three‐quarters of the variation in real annual aggregate investment growth. Plans have substantial forecasting power for excess stock returns, showing that time‐varying risk premia affect investment.

The Diversification Discount: Cash Flows Versus Returns

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00386

Owen A. Lamont, Christopher Polk

Diversified firms have different values from comparable portfolios of single‐segment firms. These value differences must be due to differences in either future cash flows or future returns. Expected security returns on diversified firms vary systematically with relative value. Discount firms have significantly higher subsequent returns than premium firms. Slightly more than half of the cross‐sectional variation in excess values is due to variation in expected future cash flows, with the remainder due to variation in expected future returns and to covariation between cash flows and returns.

Investor Reaction to Salient News in Closed‐End Country Funds

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.265570

Peter Klibanoff, Owen Lamont, Thierry A. Wizman

We use panel data on prices and net asset values to test whether dramatic country‐specific news affects the response of closed‐end country fund prices to asset value. In a typical week, prices underreact to changes in fundamentals; the (short‐run) elasticity of price with respect to asset value is significantly less than one. In weeks with news appearing on the front page of The New York Times, prices react much more; the elasticity of price with respect to asset value is closer to one. These results are consistent with the hypothesis that news events lead some investors to react more quickly.