Is Valuation Driven More By Cash Flows or Discount Rates?

Here's one for my next semester's Security Analysis class: In "What Drives Stock Price Movement?" Long Chen and Xinlei Zhao use analyst forecast and stock market data to examine whether stock price changes are associated more with changes in cash flows or discount rates. Here's the abstract (note: the emphasis is mine):

A central issue in asset pricing is whether stock prices move due to the revisions of expected future cash flows or/and of expected discount rates, and by how much of each. Using consensus cash flow forecasts, we show that there is a significant component of cash flow news in stock returns, whose importance increases with investment horizons. For horizons over three years, the importance of cash flow news far exceeds that of discount rate news. These conclusions hold at both firm and aggregate levels, and diversification only plays a secondary role in affecting the relative importance of cash flow/discount rate news. The conventional wisdom that cash flow news dominates at the firm level but discount rate news dominates at the aggregate level is largely a myth driven by the estimation methods. Finally, stock returns and cash flow news are positively correlated at both firm and aggregate levels.

HT: CXO Advisory Group