How Do Managers Move Firm Value? Cash Flows vs. Expected Returns

Stock prices are mechanically driven by changes in either expected cash flows or discount rates (expected returns). Fundamentally firm values move with managerial decisions. We explore through which channel managers commonly affect their firms' value. A variance decomposition analysis indicates that when managers have a greater degree of discretion – i.e., when CEO compensation and ownership are high, and in unregulated and heterogeneous industries – cash-flow news becomes significantly more important in driving stock returns, while expected - return news becomes significantly less important. This suggests that managers move firm value mainly by changing expected cash flows and not firm risk