Predictability Of Returns And Cash Flows

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The authors review the literature on return and cash flow growth predictability from the perspective of the present-value identity. They focus predominantly on recent work. The emphasis is on U.S. aggregate stock return predictability, but they also discuss evidence from other asset classes and countries. Stock prices move substantially relative to measures of fundamentals, such as dividends. The question of what moves stock prices has received an enormous amount of attention in the financial economics literature. Time variation in the price-dividend ratio is intimately linked to time variation in expected returns and in expected dividend growth rates.