Dividend Growth, Cash Flow and Discount Rate News
45 Pages Posted: 1 Nov 2011
Date Written: October 31, 2011
Using a new variable based on a model of dividend smoothing, we find dividend growth is highly predictable and cash flow news contributes importantly to return variability. Cash flow betas derived from this predictability are central to explaining the size effect in the cross section of returns. However, they do not explain the value effect; this is explained by noise betas. We also find that the relative importance of cash flow news in explaining recent stock price run-ups and subsequent falls increases when cash flow news is estimated directly.
Keywords: dividend growth, predictability, cash flow news, discount rate news
JEL Classification: G1
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