Journal of Financial and Quantitative Analysis

Research Articles

Dividend Growth, Cash Flow, and Discount Rate News

Ian Garretta1 and Richard Priestleya2

a1, Manchester Business School, University of Manchester, Booth Street West, Manchester M15 6PB, UK

a2, BI Norwegian School of Management, Nydalsveien, N-0442 Oslo, Norway


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.