Corporate Activities and the Market Risk Premium

Abstract

While existing asset pricing studies focus on macroeconomic variables to predict stock market risk premium, we find that an aggregate index of corporate activities has substantially greater predictive power both in- and out-of sample, and yields much greater economic gain for a mean-variance investor. The predictive ability of the corporate index stems from its information content about future cash flows and expected corporate investments. Cross-sectionally, the corporate index performs particularly well for stocks with great information asymmetry.