Abstract: We document an information channel for core inflation shocks in the relative pricing of cross-sectional stocks. We estimate stock-level core inflation exposures using an announcement-day approach, as, unlike the energy component, the release of the core component is concentrated on CPI announcement days. We find: 1) significant and persistent cross-sectional spread in core inflation exposure; 2) firms with positive inflation exposure later experience increased cash flow as inflation rises; and 3) the relative pricing of stocks with diverging core inflation exposures significantly predicts core inflation shocks and the economists’ forecasting errors. The predictability is especiallystrong under heightened inflation risk, including the surges in 2021 and 1973, and when the Fed is behind the curve. Our overall results indicate active price discovery in cross-sectional stocks for core inflation shocks through the cash flow channel.
Abstract: Since firms time the stock market through equity net issuance, the direction of net issuance reveals their net present value calculation and perceived cost of equity. Building on this insight, we develop a test to identify the asset pricing model that most closely aligns with firms' perceived cost of equity based on their net issuance decisions. Our findings show that the CAPM-implied mispricing better explains net issuance decisions compared to other factor models or market multiples. Our results are not driven by issuance related to external financing needs and hold true even for firms with extreme size or value characteristics.
Discussant: Xing Huang, Washington University-St. Louis
