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What Drives Stock Price Movement?

53 Pages Posted: 18 Apr 2008 Last revised: 24 Mar 2012

Long Chen

Cheung Kong Graduate School of Business

Zhi Da

University of Notre Dame - Mendoza College of Business

Xinlei Shelly Zhao

Government of the United States of America - Office of the Currency Comptroller - Risk Analysis Division

Date Written: March 20, 2012

Abstract

A central issue in asset pricing is whether stock prices move because of revisions of expected future cash flows or expected discount rates, and by how much of each. Using direct cash flow forecasts, we show that there is a significant component of cash flow news in stock returns, and its importance compared to discount rate news increases with the investment horizon. For horizons over two years, cash flow news is more important than discount rate news. These conclusions hold at both the firm and aggregate levels, and diversification plays only a secondary role in affecting the relative importance of cash flow and discount rate news. Overall, the findings demonstrate the importance of cash flow in asset pricing.

Keywords: Expected return, discount rate news, cash flow news, predictability, analyst forecast

JEL Classification: G12, E44

Suggested Citation

Chen, Long and Da, Zhi and Zhao, Xinlei Shelly, What Drives Stock Price Movement? (March 20, 2012). Available at SSRN: https://ssrn.com/abstract=1121893 or http://dx.doi.org/10.2139/ssrn.1121893

Long Chen (Contact Author)

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

Zhi Da

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Xinlei Zhao

Government of the United States of America - Office of the Currency Comptroller - Risk Analysis Division ( email )

250 E Street, SW
Washington, DC 20219
United States

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