Electronic copy available at: http://ssrn.com/abstract=2177191 Production-Based Term Structure of Equity Returns Hengjie Ai, Mariano M. Croce, Anthony M. Diercks and Kai Li * Abstract We study the link between timing of cash flows and expected returns in general equilibrium production economies. Our model incorporates (i) heterogenous exposure to aggregate pro- ductivity shocks across capital vintages, and (ii) an endogenous stock of growth options. Our economy features a V-shaped term structure of aggregate dividends in which dividend yields decrease with maturity up to ten years, consistent with the empirical findings of Binsber- gen et al. (2012a). Our model also reproduces the empirical negative relationship between cash-flow duration and expected returns in the cross section of book-to-market sorted stocks. Keywords: Term Structure, Duration, Value Premium First Draft: October 2012. This Draft: November 2012 * Hengjie Ai is an assistant professor at the Carlson School of Management, University of Minnesota (hengjie.ai@gmail.com). Mariano Massimiliano Croce is an assistant professor at the Kenan-Flagler Business School, UNC–Chapel Hill (mmc287@gmail.com). Anthony M. Diercks is a graduate student in the Economics Department of UNC (diercks@live.unc.edu). Kai Li is a graduate student in the Economics Department of Duke University (kai.li@duke.edu). We thank Andrew Abel, Ravi Bansal, Joao Gomes, Amir Yaron, Nick Roussanov, and Lukas Schmid for their helpful comments on our article. We thank our discussant John Heaton. We also thank seminar participants at the 2013 AEA Meetings, the Wharton School, the Kenan-Flagler Business School (UNC), London Business School, the 2013 Carlson School of Management (UMN) Macro-Finance Conference , and the Fuqua School of Business.