Cash Distributions and Returns

48 Pages Posted: 23 Mar 2005

See all articles by Qin Lei

Qin Lei

University of Michigan at Ann Arbor

Date Written: April 20, 2006


Discounted cash flow analysis suggests that high cash-flow-to-price ratios should predict high future stock return, low future cash flow growth, or both. Existing studies on the predictive power of the dividend-price ratio, however, produce evidence largely inconsistent with this prediction. In this paper, we address this issue by focusing on the total cash distributions that include both dividends and share repurchases net of seasoned equity offerings. Utilizing a long time series of the total-cash-distributions-to-price (tp) ratio constructed from CRSP data since 1927, we establish strong and persistent evidence of stock return predictability at the annual horizon. Based on a wide variety of evaluation methods, the tp ratio is both statistically and economically significant in predicting future stock market returns, and serves as a pervasive state proxy.

Keywords: Stock Return Predictability, Payout Policy, Market Timing

JEL Classification: G12, G35

Suggested Citation

Lei, Qin, Cash Distributions and Returns (April 20, 2006). Available at SSRN: or

Qin Lei (Contact Author)

University of Michigan at Ann Arbor ( email )

Ross School of Business
701 Tappan Street
Ann Arbor, MI 48109-1234
United States


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