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Cash Flow News and Stock Price Dynamics

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  • Timmermann, Allan
  • Pettenuzzo, Davide
  • Sabbatucci, Riccardo

Abstract

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.

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  • Timmermann, Allan & Pettenuzzo, Davide & Sabbatucci, Riccardo, 2019. "Cash Flow News and Stock Price Dynamics," CEPR Discussion Papers 14117, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14117
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    Cited by:

    1. Caravello, Tomas E. & Psaradakis, Zacharias & Sola, Martin, 2023. "Rational bubbles: Too many to be true?," Journal of Economic Dynamics and Control, Elsevier, vol. 151(C).
    2. Boudoukh, Jacob & Israel, Ronen & Richardson, Matthew, 2022. "Biases in long-horizon predictive regressions," Journal of Financial Economics, Elsevier, vol. 145(3), pages 937-969.
    3. Lof, Matthijs & Nyberg, Henri, 2024. "Discount rates and cash flows: A local projection approach," Journal of Banking & Finance, Elsevier, vol. 162(C).
    4. Pettenuzzo, Davide & Sabbatucci, Riccardo & Timmermann, Allan, 2023. "Dividend suspensions and cash flows during the Covid-19 pandemic: A dynamic econometric model," Journal of Econometrics, Elsevier, vol. 235(2), pages 1522-1541.
    5. Pettenuzzo, Davide & Sabbatucci, Riccardo & Timmermann, Allan, 2023. "Payout suspensions during the Covid-19 pandemic," Economics Letters, Elsevier, vol. 224(C).
    6. Ye Li & Chen Wang, 2023. "Valuation Duration of the Stock Market," Papers 2310.07110, arXiv.org.

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    Keywords

    High-frequency cash flow news; Dividend growth; Present value model;
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