Cash Flow News and Stock Price Dynamics
83 Pages Posted: 1 Mar 2018 Last revised: 1 Oct 2018
Date Written: September 11, 2018
We develop a new approach to modeling dynamics in cash flow data extracted from daily firm-level dividend announcements. We decompose the daily cash flow news series into a persistent component, jumps, and temporary shocks. Empirically, we find that the persistent cash flow growth component predicts future dividend growth and is significantly positively correlated with stock market returns. Cash flow dynamics have sizeable and long-lasting effects on the volatility and jump probability of stock returns through an uncertainty transmission channel. Finally, we find that news about the persistent cash flow growth component is correlated with a variety of cross-sectional risk factors.
Keywords: High-frequency cash flow news; predictability of dividend growth; jump risk; dynamics in stock returns; uncertainty transmission channel; Bayesian modeling
JEL Classification: G12,G17
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