Forecasting cash flow model

Abstract

This paper reviews a theoretical model of earnings, dividends and returns developed by Hobbes, Partington, and Stevenson,1996 (hetesfter, HPS model). The paper extends the HPS model by introducing the cash flow variable. We extend the model by arguing that returns are function of earnings changes, earnings levels, dividend changes including a shock component of current dividends and cash flow changes. Again the variables used in this models are observable and could be helpful to most empirical studies.