DP14117 Cash Flow News and Stock Price Dynamics

Author(s): Davide Pettenuzzo, Riccardo Sabbatucci, Allan Timmermann
Publication Date: November 2019
Keyword(s): Dividend growth, High-frequency cash flow news, Present value model
JEL(s):
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14117

We develop a new approach to modeling dynamics in cash flow data extracted from daily firm-level dividend announcements. We decompose daily cash flow news into a persistent component, jumps, and temporary shocks. Empirically, we find that the persistent cash flow component is a highly significant predictor of future growth in dividends and consumption. Using a log-linearized present value model, we show that news about the persistent dividend growth component helps predict stock returns consistent with asset-pricing constraints implied by this model. News about the daily dividend growth process also helps explain concurrent return volatility and the probability of jumps in stock returns.