 The return of return dominance: Decomposing the cross-section of pricesRicardo Delao, Xiao Han and Sean Myers Journal of Financial Economics, 2025, vol. 169, issue C Abstract: What explains cross-sectional dispersion in stock valuation ratios? We find that 75% of dispersion in price–earnings ratios is reflected in differences in future returns, while only 25% is reflected in differences in future earnings growth. This holds at both the portfolio-level and the firm-level. We reconcile these conclusions with previous literature which has found a strong relation between prices and future profitability. Our results support models in which the cross-section of price–earnings ratios is driven mainly by discount rates or mispricing rather than future earnings growth. Evaluating six models of the value premium, we find that most models struggle to match our results; however, models with long-lived differences in risk exposure or gradual learning about parameters perform the best. The lack of earnings growth differences at long horizons provides new evidence in favor of long-run return predictability. We also show a similar dominance of predicted returns for explaining the dispersion in return surprises. Keywords: Price dispersion; Return predictability; Earnings growth; Value premium; Cross-sectional models (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:169:y:2025:i:c:s0304405x25000674 DOI: 10.1016/j.jfineco.2025.104059 Access Statistics for this article Journal of Financial Economics is currently edited by G. William Schwert More articles in Journal of Financial Economics from Elsevier |
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