Cash Flow Duration and the Term Structure of Equity Returns
The term structure of equity returns is downward sloping: stocks with high cash flow duration earn 1.10% per month lower returns than short duration stocks in the cross section. I create a measure of cash flow duration at the firm level using balance sheet data to show this novel fact. Factor models can explain only 50% of the return differential, and the difference in returns is three times larger after periods of high investor sentiment. I use institutional ownership as a proxy for short sale constraints, and find the negative cross sectional relationship between cash flow duration and returns is only contained within short sale constrained stocks.