Ferdinand, the Unpredictable Bull : Cash Flow Distribution Behavior During U.S. Recessions - An Event Time Analysis

Abstract: The paper employs an event study approach to investigate the behavior of aggregate cash flow distributions and stock prices in the U.S. stock market around recessions. Aggregate prices anticipate low aggregate dividend and economic growth until adjusting for the diverse time measurement methodologies. Once adjusted, aggregate prices fall contemporaneously with aggregate cash flow measures at the onset of recessions. Prices drop substantially more than dividends. We find the inverse is true for net repurchases. This indicates a misalignment in the present-value relationship between aggregate prices and aggregate cash flows around U.S. recession event time. Further, the predictive power of recessions by the aggregate unadjusted price-dividend ratio is lost when substituting the cash flow component with aggregate net repurchases and net payout.