Dogs and Cats Living Together: A Defense of Cash-Flow Predictability

Abstract

Present-value logic says that aggregate stock prices are driven by discount-rate and cash-flow expectations. Dividends and net repurchases are both cash flows between the firm and household sectors. Aggregate dividend-price ratios do not forecast dividend growth, but do robustly forecast future buybacks and issuance. Long-run variance decompositions say that discount-rate and cash-flow expectations contribute equally to aggregate dividend-price-ratio variation; out-of-sample evidence points only to cash flows.

Keywords: Dividend-Price Ratio, Predictability, Cash Flows, Discount Rates, GMM, Buyback, Issuance

JEL Classification: G10, G12, G35