Cash Flow Growth and Stock Return

I extend financial literature by presenting a model that expresses a firm’s expected stock return as a function of its expected total cash flow growth, as opposed to simply dividend growth or profits. This is important because dividends and profits do not necessarily reflect shareholder value. Cross-sectional and time-series results support the hypothesis that realized cash flow growth and expected cash flow growth are positively related to stock returns. Evidence additionally suggests that the explanatory power in cash flow growth lies in it reflecting both operating performance and investing activities of the firm, with operating performance being relatively more economically and statistically significant.