This paper uses a vector autoregressive (VAR) model to decompose firm-level stock returns into two components: changes in cash-flow expectations (cash-flow news) and changes in discount rates (expected-return news). The VAR analysis reveals three key findings. First, firm-level stock returns are primarily driven by cash-flow news, with its variance being more than twice that of expected-return news. Second, shocks to expected returns and cash flows are positively correlated for small stocks. Third, expected-return news is highly correlated across firms, while cash-flow news can be diversified away in aggregate portfolios. The study estimates a VAR from a large firm-level panel (1954–1996 CRSP-COMPUSTAT intersection) to decompose firm-level stock returns into cash-flow and expected-return news. The results show that cash-flow news is the dominant factor driving firm-level stock returns. The variance of cash-flow news is significantly higher than that of expected-return news, and the correlation between cash-flow news and expected-return shocks is positive, especially for smaller stocks. The paper also finds that cash-flow news is more easily diversified away in portfolios than expected-return news. For an equal-weight portfolio, the variance of cash-flow news is only three-quarters of the variance of expected-return news. This suggests that cash-flow information is largely firm-specific, while expected-return information is driven by systematic, macroeconomic factors. The study reconciles firm-level return variance decomposition with aggregate return variance decompositions. While aggregate stock returns are mainly driven by expected-return news, firm-level cash-flow news is largely diversified away in aggregate portfolios. The results show that cash-flow information is largely firm-specific, while expected-return information is predominantly driven by systematic, macroeconomic components. The paper concludes that firm-level stock returns are mainly driven by cash-flow news, with expected-return news playing a secondary role.This paper uses a vector autoregressive (VAR) model to decompose firm-level stock returns into two components: changes in cash-flow expectations (cash-flow news) and changes in discount rates (expected-return news). The VAR analysis reveals three key findings. First, firm-level stock returns are primarily driven by cash-flow news, with its variance being more than twice that of expected-return news. Second, shocks to expected returns and cash flows are positively correlated for small stocks. Third, expected-return news is highly correlated across firms, while cash-flow news can be diversified away in aggregate portfolios. The study estimates a VAR from a large firm-level panel (1954–1996 CRSP-COMPUSTAT intersection) to decompose firm-level stock returns into cash-flow and expected-return news. The results show that cash-flow news is the dominant factor driving firm-level stock returns. The variance of cash-flow news is significantly higher than that of expected-return news, and the correlation between cash-flow news and expected-return shocks is positive, especially for smaller stocks. The paper also finds that cash-flow news is more easily diversified away in portfolios than expected-return news. For an equal-weight portfolio, the variance of cash-flow news is only three-quarters of the variance of expected-return news. This suggests that cash-flow information is largely firm-specific, while expected-return information is driven by systematic, macroeconomic factors. The study reconciles firm-level return variance decomposition with aggregate return variance decompositions. While aggregate stock returns are mainly driven by expected-return news, firm-level cash-flow news is largely diversified away in aggregate portfolios. The results show that cash-flow information is largely firm-specific, while expected-return information is predominantly driven by systematic, macroeconomic components. The paper concludes that firm-level stock returns are mainly driven by cash-flow news, with expected-return news playing a secondary role.