Cash flow growth and stock returns

Abstract

I extend the financial economic literature by presenting and testing a model that expresses a firm's expected stock return as a function of its expected free cash flow growth. Results suggest that cash flow growth is positively associated with stock returns. Furthermore, additional information is reflected through cash flow growth relative to cash flow, profits, and dividends. Evidence additionally suggests that operating activities explain more than investment activities of the firm. I find that $1 invested in the long–short cash flow growth portfolio grows to $15.30 over the sample period, whereas $1 invested in the stock market grows to $9.85.