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Dividend Growth, Cash Flow, and Discount Rate News

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  • Garrett, Ian
  • Priestley, Richard

Abstract

Using a new variable based on a model of dividend smoothing, we find that dividend growth is highly predictable and that cash flow news contributes importantly to return variability. Cash flow betas derived from this predictability are central to explaining the size effect in the cross section of returns. However, they do not explain the value effect; this is explained by noise betas. We also find that the relative importance of cash flow news in explaining recent stock price run-ups and subsequent declines increases when cash flow news is estimated directly.

Suggested Citation

  • Garrett, Ian & Priestley, Richard, 2012. "Dividend Growth, Cash Flow, and Discount Rate News," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(5), pages 1003-1028, October.
    • Handle: RePEc:cup:jfinqa:v:47:y:2012:i:05:p:1003-1028_00
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    Cited by:

    1. Ehab Yamani & David Rakowski, 2018. "Cash Flow and Discount Rate Risk in the Investment Effect: A Downside Risk Approach," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 1-40, September.
    2. Ma, Feng & Wang, Ruoxin & Lu, Xinjie & Wahab, M.I.M., 2021. "A comprehensive look at stock return predictability by oil prices using economic constraint approaches," International Review of Financial Analysis, Elsevier, vol. 78(C).
    3. Catherine Georgiou, 2022. "Modifications on Book-Valued Ratios," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Democritus University of Thrace (DUTH), Kavala Campus, Greece, vol. 15(3), pages 24-37, December.
    4. Yeh, Chung-Ying & Hsu, Junming & Wang, Kai-Li & Lin, Che-Hui, 2015. "Explaining the default risk anomaly by the two-beta model," Journal of Empirical Finance, Elsevier, vol. 30(C), pages 16-33.
    5. Yaojie Zhang & Mengxi He & Zhikai Zhang, 2024. "Forecasting stock returns with industry volatility concentration," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 43(7), pages 2705-2730, November.
    6. Chava, Sudheer & Gallmeyer, Michael & Park, Heungju, 2015. "Credit conditions and stock return predictability," Journal of Monetary Economics, Elsevier, vol. 74(C), pages 117-132.
    7. Reis, Pedro Manuel Nogueira & Pinho, Carlos, 2020. "A new European investor sentiment index (EURsent) and its return and volatility predictability," Journal of Behavioral and Experimental Finance, Elsevier, vol. 27(C).
    8. Catherine Georgiou, 2020. "The British Stock Market under the Structure of Market Capitalization Value: New Evidence on its Predictive Content," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Democritus University of Thrace (DUTH), Kavala Campus, Greece, vol. 13(3), pages 56-69, December.
    9. Yu, Deshui & Huang, Difang & Chen, Li & Li, Luyang, 2023. "Forecasting dividend growth: The role of adjusted earnings yield," Economic Modelling, Elsevier, vol. 120(C).
    10. Mihai, Marius M. & Mansur, Iqbal, 2022. "Forecasting crash risk in U.S. bank returns—The role of credit booms," Journal of Corporate Finance, Elsevier, vol. 76(C).
    11. Maio, Paulo & Philip, Dennis, 2015. "Macro variables and the components of stock returns," Journal of Empirical Finance, Elsevier, vol. 33(C), pages 287-308.
    12. Deshui Yu & Yayi Yan, 2023. "Joint dynamics of stock returns and cash flows: A time‐varying present‐value framework," Financial Management, Financial Management Association International, vol. 52(3), pages 513-541, September.
    13. Bassam M. ABU-ABBAS, 2021. "The Role of Dividends on Equity Valuation: Evidence from the GCC Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 162-180, June.
    14. Lof, Matthijs & Nyberg, Henri, 2024. "Discount rates and cash flows: A local projection approach," Journal of Banking & Finance, Elsevier, vol. 162(C).
    15. Ruan, Qingsong & Wang, Zilin & Zhou, Yaping & Lv, Dayong, 2020. "A new investor sentiment indicator (ISI) based on artificial intelligence: A powerful return predictor in China," Economic Modelling, Elsevier, vol. 88(C), pages 47-58.
    16. Wang, Yudong & Pan, Zhiyuan & Liu, Li & Wu, Chongfeng, 2019. "Oil price increases and the predictability of equity premium," Journal of Banking & Finance, Elsevier, vol. 102(C), pages 43-58.
    17. Kausar, Rabia & Qayyum, Abdul, 2018. "How Cash Flow News and Discount Rate News Impact the Unexpected Stock Returns of Energy Firms of Pakistan," MPRA Paper 91165, University Library of Munich, Germany.
    18. Møller, Stig V. & Sander, Magnus, 2017. "Dividends, earnings, and predictability," Journal of Banking & Finance, Elsevier, vol. 78(C), pages 153-163.
    19. Pan, Zheyao & Chan, Kam Fong, 2018. "A new government bond volatility index predictor for the U.S. equity premium," Pacific-Basin Finance Journal, Elsevier, vol. 50(C), pages 200-215.
    20. Ed-Dafali, Slimane & Patel, Ritesh & Iqbal, Najaf, 2023. "A bibliometric review of dividend policy literature," Research in International Business and Finance, Elsevier, vol. 65(C).

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