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Dividends, Total Cash Flow to Shareholders, and Predictive Return Regressions

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Author Info

  • Donald Robertson

    (University of Cambridge)

  • Stephen Wright

    (Birkbeck College, University of London)

Abstract

This paper provides new evidence on the predictive power of dividend yields for U.S. aggregate stock returns. Following Miller and Modigliani, we construct a measure of the dividend yield that includes all cash flows to shareholders. We show that this alternative cash-flow yield has strong and stable predictive power for returns, and appears robust to a battery of tests that have been proposed in recent critiques of the predictability literature. © 2006 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/rest.2006.88.1.91
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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 88 (2006)
Issue (Month): 1 (February)
Pages: 91-99

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Handle: RePEc:tpr:restat:v:88:y:2006:i:1:p:91-99

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Web page: http://mitpress.mit.edu/journals/

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Web: http://mitpress.mit.edu/journal-home.tcl?issn=00346535

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References

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  1. Amit Goyal & Ivo Welch, 2002. "Predicting the Equity Premium With Dividend Ratios," NBER Working Papers 8788, National Bureau of Economic Research, Inc.
  2. Jacob Boudoukh & Roni Michaely & Matthew Richardson & Michael Roberts, 2004. "On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing," NBER Working Papers 10651, National Bureau of Economic Research, Inc.
  3. Fama, Eugene F. & French, Kenneth R., 2001. "Disappearing dividends: changing firm characteristics or lower propensity to pay?," Journal of Financial Economics, Elsevier, Elsevier, vol. 60(1), pages 3-43, April.
  4. Pesaran, M Hashem & Timmermann, Allan, 1995. " Predictability of Stock Returns: Robustness and Economic Significance," Journal of Finance, American Finance Association, American Finance Association, vol. 50(4), pages 1201-28, September.
  5. Amit Goval & Ivo Welch, 2004. "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction," NBER Working Papers 10483, National Bureau of Economic Research, Inc.
  6. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-86.
  7. Jegadeesh, Narasimhan, 1990. " Evidence of Predictable Behavior of Security Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 45(3), pages 881-98, July.
  8. Goetzmann, W.N., 1990. "Testing The Predictive Power Of Dividend Yields," Papers, Columbia - Graduate School of Business fb-_90-12, Columbia - Graduate School of Business.
  9. Gustavo Grullon & Roni Michaely, 2002. "Dividends, Share Repurchases, and the Substitution Hypothesis," Journal of Finance, American Finance Association, American Finance Association, vol. 57(4), pages 1649-1684, 08.
  10. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 34, pages 411.
  11. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 22(1), pages 3-25, October.
  12. Lewellen, Jonathan, 2004. "Predicting returns with financial ratios," Journal of Financial Economics, Elsevier, Elsevier, vol. 74(2), pages 209-235, November.
  13. Nelson, Charles R & Kim, Myung J, 1993. " Predictable Stock Returns: The Role of Small Sample Bias," Journal of Finance, American Finance Association, American Finance Association, vol. 48(2), pages 641-61, June.
  14. Robert F. Stambaugh, 1999. "Predictive Regressions," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0240, National Bureau of Economic Research, Inc.
  15. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
  16. Ackert, Lucy F & Smith, Brian F, 1993. " Stock Price Volatility, Ordinary Dividends, and Other Cash Flows to Shareholders," Journal of Finance, American Finance Association, American Finance Association, vol. 48(4), pages 1147-60, September.
  17. Kirby, Chris, 1997. "Measuring the Predictable Variation in Stock and Bond Returns," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 10(3), pages 579-630.
  18. Bagwell, Laurie Simon & Shoven, John B, 1989. "Cash Distributions to Shareholders," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 3(3), pages 129-40, Summer.
  19. Bossaerts, Peter & Hillion, Pierre, 1999. "Implementing Statistical Criteria to Select Return Forecasting Models: What Do We Learn?," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 12(2), pages 405-28.
  20. Foster, F Douglas & Smith, Tom & Whaley, Robert E, 1997. " Assessing Goodness-of-Fit of Asset Pricing Models: The Distribution of the Maximal R-Squared," Journal of Finance, American Finance Association, American Finance Association, vol. 52(2), pages 591-607, June.
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Cited by:
  1. Chang‐Jin Kim & Cheolbeom Park, 2013. "Disappearing Dividends: Implications for the Dividend–Price Ratio and Return Predictability," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 45(5), pages 933-952, 08.
  2. Borja Larrain & Motohiro Yogo, 2005. "Does firm value move too much to be justified by subsequent changes in cash flow?," Working Papers, Federal Reserve Bank of Boston 05-18, Federal Reserve Bank of Boston.
  3. Park, Cheolbeom, 2010. "When does the dividend-price ratio predict stock returns?," Journal of Empirical Finance, Elsevier, Elsevier, vol. 17(1), pages 81-101, January.
  4. Jakob B Madsen & E Philip Davis, 2003. "Equity Prices, Productivity Growth, And ‘The New Economy’," Public Policy Discussion Papers, Economics and Finance Section, School of Social Sciences, Brunel University 03-04, Economics and Finance Section, School of Social Sciences, Brunel University.
  5. Piergiorgio Alessandri & Donald Robertson & Stephen Wright, 2008. "Miller and Modigliani, Predictive Return Regressions and Cointegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 70(2), pages 181-207, 04.
  6. Cheolbeom Park, 2006. "The Persistence and Predictive Power of the Dividend-Price Ratio," Departmental Working Papers, National University of Singapore, Department of Economics wp0603, National University of Singapore, Department of Economics.
  7. Demetrios Eliades & Olaf Weeken, 2005. "The stock market and capital accumulation: an application to UK data," Bank of England working papers, Bank of England 251, Bank of England.

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