Journal Article

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

Praveen Kumar, Sorin M. Sorescu, Rodney D. Boehme and Bartley R. Danielsen

in The Review of Financial Studies

Published on behalf of The Society for Financial Studies

Volume 21, issue 3, pages 1037-1075
Published in print May 2008 | ISSN: 0893-9454
Published online March 2008 | e-ISSN: 1465-7368 | DOI: http://dx.doi.org/10.1093/rfs/hhn016
Estimation Risk, Information, and the Conditional CAPM: Theory and Evidence

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  • Information, Knowledge, and Uncertainy
  • Intertemporal Choice and Growth
  • Macroeconomics: Consumption, Saving, Production, Employment, and Investment

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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.

Keywords: D83; D92; E22

Journal Article.  18792 words. 

Subjects: Information, Knowledge, and Uncertainy ; Intertemporal Choice and Growth ; Macroeconomics: Consumption, Saving, Production, Employment, and Investment

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