Cash Flow Performance, Profitability, and Stock Return Persistence: Evidence from Indonesian Consumer and Agricultural Firms Using System GMM

Abstract

The increasing volatility of global financial markets and the growing importance of firm-specific fundamentals have intensified the debate regarding the determinants of stock returns, particularly in emerging markets characterized by higher information asymmetry and lower market efficiency. This study examines the effects of Cash Flow per Share (CFPS), Net Profit Margin (NPM), and stock return persistence on stock returns among Consumer Non-Cyclicals and Agriculture firms listed on the Indonesia Stock Exchange during the 2014–2024 period. Using a dynamic panel data approach, the study employs the two-step System Generalized Method of Moments (System GMM) to address endogeneity, unobserved heterogeneity, and dynamic bias. The results reveal that stock returns exhibit strong persistence, as evidenced by the significant positive effect of lagged stock returns. Profitability, measured by NPM, positively and significantly influences stock returns, indicating that investors place substantial value on firms with stronger earnings performance. In contrast, CFPS has a negative and significant effect on stock returns, suggesting that higher cash flow accumulation may be interpreted as inefficient resource utilization rather than a positive valuation signal. These findings imply that profitability-based signals dominate cash-flow-based information in shaping investor decisions within emerging markets. The study contributes to the literature by extending Signaling Theory, Information Asymmetry Theory, and the Adaptive Market Hypothesis through a dynamic framework. The findings also provide practical implications for investors, corporate managers, and regulators seeking to enhance market efficiency and financial transparency in emerging economies.