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The Pricing of Dividends in Equity Valuation

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  • John R. M. Hand
  • Wayne R. Landsman
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    Abstract

    Abstract:  This study uses Ohlson's (1995 and 2001 ) accounting-based equity valuation model to structure tests of four explanations for the anomalously positive pricing of dividends reported by Rees (1997) and Fama and French (1998) . First, we find that dividends are not simply a proxy for publicly available information that helps predict future abnormal earnings. Second, although dividends act as if they signal managers' private information about future profitability, they remain positively priced for firms with low incentives to signal. Third, dividends do not signal management's willingness to abstain from incurring agency costs. Fourth, however, controlling for one-year-ahead realized forecast errors yields a pricing of dividends that is very close to that of dividend displacement. After showing that dividends are not simply a proxy for analysts' misforecasting, we conclude that dividends appear to be positively priced because they are a proxy for the mispricing by investors of current earnings or book equity. Copyright Blackwell Publishers Ltd, 2005.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

    Volume (Year): 32 (2005-04)
    Issue (Month): 3-4 ()
    Pages: 435-469

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    Handle: RePEc:bla:jbfnac:v:32:y:2005-04:i:3-4:p:435-469

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X

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    Cited by:
    1. Clare Roberts & Yue Wang, 2009. "Accounting harmonization and the value-relevance of dirty surplus accounting flows," Review of Accounting and Finance, Emerald Group Publishing, vol. 8(4), pages 340-368, November.
    2. Wang, Yue & Buijink, Willem & Eken, Rob, 2006. "The value relevance of dirty surplus accounting flows in The Netherlands," The International Journal of Accounting, Elsevier, vol. 41(4), pages 387-405, 012.
    3. Andros Gregoriou, 2010. "Corporate Valuation and Dividends: UK Evidence from Panel Unit Root and Cointegration Tests," Atlantic Economic Journal, International Atlantic Economic Society, vol. 38(1), pages 15-22, March.
    4. Shah, Syed Zulfiqar Ali & Stark, Andrew W. & Akbar, Saeed, 2009. "The value relevance of major media advertising expenditures: Some U.K. evidence," The International Journal of Accounting, Elsevier, vol. 44(2), pages 187-206, June.
    5. Mark Aleksanyan & Khondkar Karim, 2013. "Searching for value relevance of book value and earnings: a case of premium versus discount firms," Review of Quantitative Finance and Accounting, Springer, vol. 41(3), pages 489-511, October.
    6. Heinrichs, Nicolas & Hess, Dieter & Homburg, Carsten & Lorenz, Michael & Sievers, Soenke, 2011. "Extended dividend, cash flow and residual income valuation models: Accounting for deviations from ideal conditions," CFR Working Papers 11-11, University of Cologne, Centre for Financial Research (CFR).
    7. Misund, Bård & Asche, Frank & Osmundsen, Petter, 2008. "Industry upheaval and valuation: Empirical evidence from the international oil and gas industry," The International Journal of Accounting, Elsevier, vol. 43(4), pages 398-424, December.
    8. Lee, Shih-Cheng & Lin, Chien-Ting & Chang, Pei-Ting, 2011. "An Ohlson valuation framework for valuing corporate governance: The case of Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 19(4), pages 420-434, September.
    9. Al-Hares, Osama M. & AbuGhazaleh, Naser M. & Haddad, Ayman E., 2012. "Value relevance of earnings, book value and dividends in an emerging capital market: Kuwait evidence," Global Finance Journal, Elsevier, vol. 23(3), pages 221-234.

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