Subjective Cash Flow and Discount Rate Expectations

71 Pages Posted: 13 May 2021

See all articles by Ricardo De la O

Ricardo De la O

University of Southern California - Marshall School of Business

Sean Myers

The Wharton School, University of Pennsylvania

Date Written: October 21, 2020

Abstract

Why do stock prices vary? Using survey forecasts, we find that cash flow growth expectations explain most movements in the S&P 500 price-dividend and price-earnings ratios, accounting for at least 93% and 63% of their variation. These expectations comove strongly with price ratios, even when price ratios do not predict future cash flow growth. In comparison, return expectations have low volatility and small comovement with price ratios. Short-term, rather than long-term, expectations account for most price ratio variation. We propose an asset pricing model with beliefs about earnings growth reversal that accurately replicates these cash flow growth expectations and dynamics.

Keywords: cashflow news, return predictability, risk premia, price volatility, subjective expectations

JEL Classification: G00, G02, G12, G14

Suggested Citation

De la O, Ricardo and Myers, Sean, Subjective Cash Flow and Discount Rate Expectations (October 21, 2020). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3841696 or http://dx.doi.org/10.2139/ssrn.2938634

Ricardo De la O

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd, HOH 803
Los Angeles, CA California 90089-1424
United States

Sean Myers (Contact Author)

The Wharton School, University of Pennsylvania ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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