Are Dividends and Stock Returns Predictable? New Evidence Using M&A Cash Flows

51 Pages Posted: 16 Mar 2015 Last revised: 30 Nov 2022

See all articles by Riccardo Sabbatucci

Riccardo Sabbatucci

Stockholm School of Economics; Swedish House of Finance

Date Written: October 24, 2015


The lack of predictability of aggregate dividends by the traditional dividend-price ratio has long been considered a puzzle - “the dog that did not bark,” Cochrane (2008a). I show that this evidence is due to the mismeasurement of dividends used in empirical work. If M&A cash dividends are taken into account, the adjusted R2 from a regression of dividend growth on the lagged dividend-price ratio goes from being negative (-1.07%) to positive (17.47%), and coefficients become highly statistically significant. Strong improvements are also found for consumption growth (-1.09% to 10.63%), and out-of-sample return predictability. I also document that dividend-price variation is strongly linked to cash flow news and not only to discount rate news. Lastly, I find stronger predictability in industries with the largest M&A activity.

Keywords: Mergers and acquisitions; M&A cash flows; Dividend and consumption growth predictability; Return predictability

JEL Classification: G11, G12, G17

Suggested Citation

Sabbatucci, Riccardo, Are Dividends and Stock Returns Predictable? New Evidence Using M&A Cash Flows (October 24, 2015). Available at SSRN: or

Riccardo Sabbatucci (Contact Author)

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm

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