Does Firm Value Move Too Much to Be Justified By Subsequent Changes in Cash Flow?

55 Pages Posted: 4 Mar 2006 Last revised: 17 Jun 2009

Borja Larrain

Pontificia Universidad Catolica de Chile

Motohiro Yogo

Princeton University - Department of Economics; National Bureau of Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: June 21, 2007

Abstract

The appropriate measure of cash flow for valuing corporate assets is net payout, which is the sum of dividends, interest, and net repurchases of equity and debt. Variation in net payout yield, the ratio of net payout to asset value, is mostly driven by movements in expected cash flow growth, instead of movements in discount rates. Net payout yield is less persistent than dividend yield and implies much smaller variation in long-horizon discount rates. Therefore, movements in the value of corporate assets can be justified by changes in expected future cash flow.

Keywords: Asset valuation, Excess volatility, Payout policy, Valuation ratio

JEL Classification: G12, G32, G35

Suggested Citation

Larrain, Borja and Yogo, Motohiro, Does Firm Value Move Too Much to Be Justified By Subsequent Changes in Cash Flow? (June 21, 2007). Journal of Financial Economics (JFE), Vol. 87, No. 1, 2008. Available at SSRN: https://ssrn.com/abstract=887520

Borja Larrain

Pontificia Universidad Catolica de Chile ( email )

Ave. Vicuna Mackenna 4860, Macul
Santiago
Chile

HOME PAGE: http://economiayadministracion.uc.cl/personal/blarrain/

Motohiro Yogo (Contact Author)

Princeton University - Department of Economics ( email )

Julis Romo Rabinowitz Building
Princeton, NJ 08544
United States

HOME PAGE: http://sites.google.com/site/motohiroyogo/

National Bureau of Economic Research

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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