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  • 2021
  • Working Paper
  • HBS Working Paper Series

Stock Investors' Returns Are Exaggerated

By: Jesse M. Fried, Paul Ma and Charles C.Y. Wang
  • Format:Print
  • | Language:English
  • | Pages:37
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Abstract

The stock market generates less wealth than it appears. We show that total shareholder return (TSR), the standard measure of stock investor performance, substantially exaggerates returns earned by these investors in aggregate, and thus by most investors. The main reason: from investors’ collective perspective, dividends cannot be reinvested in public equity, as TSR assumes, but only in other lower-yielding assets. In addition, TSR is inflated by well-timed repurchases and equity issuances that merely transfer value among investors. We put forward another measure—“all-shareholder return” (ASR)—which better captures the wealth generated by the stock market for investors. We estimate that the ASR equity premium is 17 to 73% lower than the TSR-implied equity premium, depending on the investment alternative. We also estimate that the wedge between ASR and TSR is primarily driven by the reinvestment effect. However, over time, the reinvestment effect declines while the timing effect of cash flows increases, consistent with rising stock issuances and buybacks.

Keywords

All-shareholder Returns; Capital Flows; Dividend Reinvestment; Equity Premium; Total Shareholder Returns; Stocks; Investment Return; Market Timing

Citation

Fried, Jesse M., Paul Ma, and Charles C.Y. Wang. "Stock Investors' Returns Are Exaggerated." Harvard Business School Working Paper, No. 22-036, November 2021.
  • SSRN
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About The Author

Charles C.Y. Wang

Accounting and Management
→More Publications

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More from the Authors
  • A Decade of Corporate Governance Reform in Japan (2013-2023) By: Charles C.Y. Wang and Akiko Kanno
  • Silicon Valley Bank: Gone in 36 Hours By: Jung Koo Kang, Krishna G. Palepu, Charles C.Y. Wang and David Lane
  • Harvard Students Should Ignore Calls to Boycott Israel Trek By: Jesse M. Fried, Paul A. Gompers, Scott Kominers and Mark C. Poznansky
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