Journal of Financial Services Research

, Volume 19, Issue 2–3, pp 115–129 | Cite as

An Empirical Examination of the Price-Dividend Relation with Dividend Management

  • Lucy F. Ackert
  • William C. Hunter
Article

Abstract

Some recent empirical evidence suggests that stock prices are not properly modeled as the present discounted value of expected dividends. In this paper, we estimate a present value model of stock price that is capable of explaining the observed long-term trends in stock prices. The model recognizes that firm managers control cash dividend payments. The model estimates indicate that stock price movements may be explained by managerial behavior.

stock price determination volatility dividend payout present value model 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Ackert, Lucy F., and William C. Hunter. “Intrinsic Bubbles: The Case of Stock Prices, a Comment.” American Economic Review 89,no. 5 (December 1999), 1372-1376.Google Scholar
  2. Ackert, Lucy F., and Brian F. Smith. “Stock Price Volatility, Ordinary Dividends, and Other Cash Flows to Shareholders.” Journal of Finance 48,no 4 (September 1993), 1147-1160.Google Scholar
  3. Bagwell, Laurie Simon, and John B. Shoven. “Cash Distributions to Shareholders.” Journal of Economic Perspectives 3,no. 3 (1989), 129-140.Google Scholar
  4. Bentolila, Samuel, and Giuseppe Bertola. “Firing Costs and Labour Demand: How Bad Is Eurosclerosis?” Review of Economic Studies 57,no. 3 (July 1990), 381-402.Google Scholar
  5. Brittain, John A. Corporate Dividend Policy. Washington, DC: Brookings Institution, 1968.Google Scholar
  6. Camerer, Colin. “Bubbles and Fads in Asset Prices.” Journal of Economic Surveys 3,no. 1 (1989), 3-41.Google Scholar
  7. Cecchetti, Stephen G., Pok-Sang Lam, and Nelson Mark. “Mean Reversion in Equilibrium Asset Prices.” American Economic Review 80,no. 3 (1990), 398-418.Google Scholar
  8. Cochrane, John H. “Volatility Tests and Efficient Markets: A Review Essay.” Journal of Monetary Economics 27, 463-485, 1991.Google Scholar
  9. Cowles, Alfred, and associates. Common Stock Indexes, 2nd ed. Bloomington, IN: Principia Press, 1939.Google Scholar
  10. Davidson, Russell, and James G. MacKinnon, Estimation and Inference in Econometrics. New York: Oxford University Press, 1993.Google Scholar
  11. Donaldson, R. Glen, and Mark Kamstra. “A New Dividend Forecasting Procedure That Rejects Bubbles in Asset Prices: The Case of 1929 Stock Crash.” Review of Financial Studies 9,no. 2 (Summer 1996a), 333-383.Google Scholar
  12. Donaldson, R. Glen, and Mark Kamstra. “Forecasting Fundamental Asset Return Distributions and Tests for Excess Volatility and Bubbles.” Working paper, Simon Fraser University, January, 1996b.Google Scholar
  13. Fama, Eugene F. “Efficient Capital Markets: A Review of Theory and Empirical Work.” Journal of Finance 25,no. 2 (May 1970), 383-417.Google Scholar
  14. Fama, Eugene F. “Efficient Capital Markets: II.” Journal of Finance 46,no. 5 (December 1991), 1575-1617.Google Scholar
  15. Fama, Eugene F., and Harvey Babiak. “Dividend Policy: An Empirical Analysis.” Journal of the American Statistical Association 63 (1968), 1132-1161.Google Scholar
  16. Fama, Eugene F., and Kenneth R. French. “Dividend Yields and Expected Stock Returns.” Journal of Financial Economics 22 (1988), 3-25.Google Scholar
  17. Flavin, Marjorie A. “Excess Volatility in the Financial Markets: A Reassessment of the Empirical Evidence.” Journal of Political Economy 91,no. 6 (1983), 929-956.Google Scholar
  18. Flood, Robert P., and Robert J. Hodrick. “On Testing for Speculative Bubbles.” Journal of Economic Perspectives 4 (Spring 1990), 85-102.Google Scholar
  19. Froot, Kenneth A., and Maurice Obstfeld. “Intrinsic Bubbles: The Case of Stock Prices.” American Economic Review 81,no. 5 (December 1991a), 1189-1214.Google Scholar
  20. Froot, Kenneth A., and Maurice Obstfeld. “Exchange-Rate Dynamics Under Stochastic Regime Shifts: A Unified Approach.” Journal of International Economics 31 (1991b), 203-229.Google Scholar
  21. Fudenberg, Drew, and Jean Tirole. “A Theory of Income and Dividend Smoothing Based on Incumbency Rents.” Journal of Political Economy 103,no. 1 (February 1995), 75-93.Google Scholar
  22. Graham, Benjamin, and David L. Dodd. Security Analysis: Principles and Technique. New York: McGraw-Hill, 1934.Google Scholar
  23. Harrison, J. Michael. Brownian Motion and Stochastic Flow Systems. New York: John Wiley and Sons, 1985.Google Scholar
  24. Kleidon, Allan W. “Variance Bounds Tests and Stock Price Valuation Models.” Journal of Political Economy 94,no. 5 (October 1986a), 953-1001.Google Scholar
  25. Kleidon, Allan W. “Empirical Assessment of Present Value Relations—Comment.” Econometric Reviews 5,no. 2 (1986b), 261-265.Google Scholar
  26. Lee, Bong-Soo. “Time-Series Implications of Aggregate Dividend Behavior.” Review of Financial Studies 9,no. 2 (1996), 589-618.Google Scholar
  27. Lehmann, Bruce. “Fads, Martingales, and Market Efficiency.” Quarterly Journal of Economics 105,no. 1 (1990), 1-28.Google Scholar
  28. LeRoy, Stephen, and Richard Porter. “The Present Value Relationship: Tests Based on Implied Variance Bounds.” Econometrica 49,no. 3 (May 1981), 555-574.Google Scholar
  29. Lintner, John. “Distribution of Incomes of Corporations Among Dividends, Retained Earnings, and Taxes,” American Economic Review 46 (1956), 97-113.Google Scholar
  30. Lo, Andrew W., and A. Craig Mackinlay. “Stock Market Prices Do Not Follow Random Walk: Evidence from a Simple Specification Test.” Review of Financial Studies 1 (1988), 41-66.Google Scholar
  31. Lucas, Robert E., Jr. “Asset Prices in an Exchange Economy.” Econometrica 46 (November 1978), 1429-1446.Google Scholar
  32. Marsh, Terry A., and Robert C. Merton. “Dividend Variability and Variance Bounds Tests for the Rationality of Stock Market Prices.” American Economic Review 76,no. 3 (June 1986), 483-498.Google Scholar
  33. Marsh, Terry A., and Robert C. Merton. “Dividend Behavior for the Aggregate Stock Market.” Journal of Business 60 (1987), 1-40.Google Scholar
  34. Mattey, Joe, and Richard Meese. “Empirical Assessment of Present Value Relations.” Econometric Reviews 5,no. 2 (1986), 171-234.Google Scholar
  35. Mehra, Rajnesh, and Edward C. Prescott. “The Equity Premium: A Puzzle.” Journal of Monetary Economics 15 (1985), 145-161.Google Scholar
  36. Miller, Merton H. “Behavioral Rationality in Finance: The Case of Dividends.” Journal of Business 59,no. 4 (1986), S451-S468.Google Scholar
  37. Miller, Merton H., and Franco Modigliani. “Dividend Policy, Growth, and the Valuation of Shares.” Journal of Business 34 (1961), 411-433.Google Scholar
  38. Newey, Whitney K., and Kenneth D. West. “A Simple Positive Definite Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica 55,no. 3 (May 1987), 703-708.Google Scholar
  39. Petit, R. Richardson. “Dividend Announcements, Security Performance, and Capital Market Efficiency.” Journal of Finance 27,no. 5 (1972), 993-1007.Google Scholar
  40. Poterba, James, and Lawrence Summers. “Mean Reversion in Stock Prices: Evidence and Implications.” Journal of Financial Economics 22 (1988), 27-59.Google Scholar
  41. Samuelson, Paul A. “Proof That Properly Discounted Present Values of Assets Vibrate Randomly.” Bell Journal of Economics and Management Science 4 (1973), 369-374.Google Scholar
  42. Shiller, Robert J. “Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends?” American Economic Review 71,no. 1 (June 1981), 421-436.Google Scholar
  43. Shiller, Robert J. Market Volatility. Cambridge, MA: MIT Press, 1989.Google Scholar
  44. Shoven, John B. “The Tax Consequences of Share Repurchases and Other Non-Dividend Cash Payments to Equity Owners.” In: Lawrence Summers, ed., Tax Policy and the Economy, vol. 1. Cambridge, MA: MIT Press, 1986, pp. 29-54.Google Scholar
  45. Warther, Vincent A. “Dividend Smoothing: A Sleeping Dogs Explanation.” Working paper, University of Southern California, January 1994.Google Scholar
  46. West, Kenneth D. “Dividend Innovations and Stock Price Variability.” Econometrica 56,no. 1 (January 1988a), 37-62.Google Scholar
  47. West, Kenneth D. “Bubbles, Fads, and Stock Price Volatility Tests: A Partial Evaluation.” Journal of Finance 43,no. 3 (July 1988b), 639-655.Google Scholar
  48. White, Eugene N. “The Stock Market Boom and Crash of 1929 Revisited.” Journal of Economic Perspectives 4,no. 2 (Spring 1990), 67-83.Google Scholar
  49. Williams, John Burr. Theory of Investment Value. Cambridge, MA: Harvard University Press, 1938.Google Scholar

Copyright information

© Kluwer Academic Publishers 2001

Authors and Affiliations

  • Lucy F. Ackert
    • 1
    • 2
  • William C. Hunter
    • 3
  1. 1.Department of Economics and Finances, Michael J. Coles College of BusinessKennesaw State UniversityKennesaw
  2. 2.Research DepartmentFederal Reserve Bank of AtlantaUSA
  3. 3.Research DepartmentFederal Reserve Bank of ChicagoUSA

Personalised recommendations