Dividend growth, stock valuation, and long-run risk
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In this paper, we integrate the long-run concept of risk into the stock valuation process. We use the intertemporal consumption capital asset pricing model to demonstrate that a stock’s long-run dividend growth is negatively related to its current dividend-price ratio and positively related to its long-run covariance between dividends and consumption. Then, we show that the equilibrium price of a stock is determined by its current dividend, long-run dividend growth, and long-run risk. In all, our work suggests that risk cumulated over many periods represents an important parameter in assessing the theoretical value of a firm.
KeywordsValuation Model Dividends Long-Run Risk Intertemporal Model CCAPM
JEL ClassificationD91 G12
I would like to thank Guy Charest, from Université du Québec à Montréal, for helpful comments. I also thank John Y. Campbell, from Harvard University, for helpful suggestions and references.
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