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|
|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.