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The Relative Importance of Cash Flow News and Discount Rate News at Driving Stock Price Change

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  • Mohsen Jafarian

    (Graduate School of Business, Universiti Kebangsaan Malaysia, Malaysia. Author-Email: jafarian@siswa.ukm.edu.my)

  • Fauzias Mat Nor

    (Faculty of Business, Universiti Sains Islam Malaysia, Malaysia.)

  • Izani Ibrahim

    (College of Business, Prince Sultan University, Saudi Arabia.)

Abstract

Which component is the main driver of stock price movement? Using vector-auto-regression-based (VAR) decomposition method, the literature finds that stock price movements are almost entirely derived by discount rate variation (DR) at the aggregate-level. Recently, extracting variations by the VAR system has been criticized. Employing implied cost of capital (ICC) approach with a sample of 809 companies over the period of 2000 to 2015, new findings demonstrate that cash flow variations (CF) are significant at aggregate-level, as well as portfolio-level. This study also finds that CF variation rises when the horizon extends from one-year ahead to fiveyear ahead. Running return decomposition at the portfolio-level shows that there are significant rising CF variations from small/large growth portfolios to small/large value portfolios. The results also show that DR demonstrates a good tracking power of the actual return for the period before 2005, but CF dominates at tracking after this period. Current research contributes to the literature by providing a fundamental explanation for the value premium.

Suggested Citation

  • Mohsen Jafarian & Fauzias Mat Nor & Izani Ibrahim, 2018. "The Relative Importance of Cash Flow News and Discount Rate News at Driving Stock Price Change," Capital Markets Review, Malaysian Finance Association, vol. 26(1), pages 56-72.
    • Handle: RePEc:mfa:journl:v:26:y:2018:i:1:p:56-72
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    References listed on IDEAS

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    Keywords

    Cash flow news; discount rate news; return decomposition; value anomaly.;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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