Discount rate variation is driven by a short run business cycle component and a longer run trend component. This leads to state variable hedging of these two components and ICAPM logic implies a three factor model for expected returns. The factors represent cash ow news, short term discount rate...

Using a new variable based on a model of dividend smoothing, we find dividend growth is highly predictable and cash flow news contributes importantly to return variability. Cash flow betas derived from this predictability are central to explaining the size effect in the cross section of returns....

Time variation in the discount rate affects investment and employment decisions in a manner consistent with Q-theory predictions. This evidence is uncovered when using cyclical consumption as proxy for the discount rate. The results, which are consistent across both U.S. and international data,...

We show that time variation in the discount rate affects investment and employment decisions in a manner consistent with both short and long run Q-theory predictions. Uncovering this novel evidence requires a proxy for the discount rate that reliably predicts stock returns. We gain further...