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Does firm value move too much to be justified by subsequent changes in cash flow?

Author

Listed:
  • Borja Larrain
  • Motohiro Yogo
Abstract
Movements in the value of corporate assets are justified by changes in expected future cash flow. The appropriate measure of cash flow for valuing assets is net payout, which is the sum of dividends, interest, and net repurchases of equity and debt. When discount rates are low and equity issuance is high, expected cash-flow growth is low because firms repurchase debt to offset equity issuance. A variance decomposition of the ratio of net payout reveals little transitory variation in discount rates that is not offset by common variation with expected cashflow growth.

Suggested Citation

  • Borja Larrain & Motohiro Yogo, 2005. "Does firm value move too much to be justified by subsequent changes in cash flow?," Working Papers 05-18, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:05-18
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    More about this item

    Keywords

    Asset pricing; Cash flow;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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