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Dividend Growth, Cash Flow, and Discount Rate News

Published online by Cambridge University Press:  04 October 2012

Ian Garrett  and
Richard Priestley
Ian Garrett
Affiliation:
ian.garrett@mbs.ac.uk, Manchester Business School, University of Manchester, Booth Street West, Manchester M15 6PB, UK
Richard Priestley
Affiliation:
richard.priestley@bi.no, BI Norwegian School of Management, Nydalsveien, N-0442 Oslo, Norway
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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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 5 , October 2012 , pp. 1003 - 1028
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

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