We analyze the dividend behaviour of the aggregate stock market. We propose a model that assumes managers minimize the costs of adjustment associated with being away from their target dividend payout. The target is expressed as a function of lagged stock prices and permanent earnings,...

Using a new variable based on a model of dividend smoothing, we find that dividend growth is highly predictable and that cash flow news contributes importantly to return variability. Cash flow betas derived from this predictability are central to explaining the size effect in the cross section...