We develop a model in which stock price changes are comprised of three parts: changes in expected dividends, changes in expected earnings, and changes in expected rates of return, which are further decomposed into a short-term and a long-term component. We use this model and de-biased Value Line analysts’ forecast of dividends, earnings and target prices to provide evidence regarding the relative importance of cash flow news (represented by revisions in dividend forecasts and earnings forecasts) and expected return news as drivers of stock price movements. By considering both earnings forecasts and dividend forecasts within the same valuation model, we reconcile the opposing conclusions in studies based on dividends as a proxy for cash flow news (Campbell and Shiller, 1988) and studies based on earnings as a proxy for cash flow news (Chen, Da, and Zhao, 2013). We show that: (1) cash flow news is very important in driving stock price movement; and, (2) the cash flow news effect on stock prices is almost entirely driven by earnings news rather than dividend news..
|State||In preparation - 1800|