Abstract

This paper studies how market-level stock price movements respond to changes in expected future aggregate cashflows versus discount rates in individual global equity markets. We find that market-level dividend yields have strong forecasting power for aggregate dividend growth over a short term in most stock markets but their forecasting power becomes weak with investment horizon; their forecasting power for returns tends to exhibit an opposite pattern. The variance decomposition of dividend yields exhibits interesting cross-country heterogeneity. We further find that dividend smoothing and country-level disclosure and investor protection are two important drivers of the diverse predictability patterns across countries. • Short-horizon dividend growth predictability by aggregate dividend yields is generally strong. • Over long horizons aggregate dividend growth predictability goes weak. • Market return predictability by dividend yields exhibits an opposite pattern. • The variance decomposition of dividend yields exhibits cross-country heterogeneity. • Dividend smoothing and disclosure are two important drivers of diverse predictability patterns.

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