Cash Flow Growth and Stock Returns

Forthcoming in the Journal of Financial Research

62 Pages Posted: 18 Sep 2016 Last revised: 21 Jan 2021

See all articles by Benjamin Jansen

Benjamin Jansen

Middle Tennessee State University - Department of Economics and Finance

Date Written: January 14, 2021

Abstract

I extend financial economic literature by presenting and testing a model that expresses a firm’s expected stock return as a function of its expected free cash flow growth. Results suggest that cash flow growth is positively associated with stock returns. Furthermore, there is additional information reflected through cash flow growth relative to cash flow, profits, and dividends. Evidence additionally suggests that operating activities explain more than investment activities of the firm. I find that $1 invested in the long-short cash flow growth portfolio grows to $15.30 over the sample period, whereas $1 invested in the stock market grows to $9.85.

Keywords: Stock returns; Cash flow growth

JEL Classification: G12; G32

Suggested Citation

Jansen, Benjamin, Cash Flow Growth and Stock Returns (January 14, 2021). Forthcoming in the Journal of Financial Research, Available at SSRN: https://ssrn.com/abstract=2840035 or http://dx.doi.org/10.2139/ssrn.2840035

Benjamin Jansen (Contact Author)

Middle Tennessee State University - Department of Economics and Finance ( email )

Murfreesboro, TN 37132
United States

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