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The dividend-price ratio does predict dividend growth: International evidence

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  • Tom Engsted

    ()
    (School of Economics and Management, University of Aarhus and CREATES)

  • Thomas Q. Pedersen

    ()
    (School of Economics and Management, University of Aarhus and CREATES)

Abstract

Unpredictable dividend growth by the dividend-price ratio is considered a 'stylized fact' in post war US data. Using long-term data, covering more than 80 years from the US and three European countries, we revisit this stylized fact, and we also report results on return predictability. We find large cross-country differences regarding return and dividend growth predictability. For the US, we confirm Chen's (2008) finding of a 'tale of two periods' but with the important difference that short- and long-horizon real returns are significantly predictable in both sub-periods (1871- 1949 and 1950-2008), while long-horizon real dividend growth is unpredictable in the early period and significantly predictable in the 'wrong' direction in the post war period. These results are directly opposite to those reported by Chen using nominal returns and dividend growth. For the UK, the results are more or less similar to those for the US. For Sweden and Denmark we find no evidence of return predictability, but strong evidence of predictable dividend growth in the 'right' direction on both short and long horizons and over both the full sample periods and the post war period. We also document that implied long-horizon coefficients from VAR's often differ substantially from direct estimates in multi-year regres- sions. Throughout, we report both standard asymptotic tests and simulated small- sample tests and, following Cochrane (2008), we investigate the joint distribution of dividend-price ratio coefficients in return and dividend growth regressions.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2009-36.

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Length: 38
Date of creation: 23 Jul 2009
Date of revision:
Handle: RePEc:aah:create:2009-36

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: Dividend-price ratio; equity return and dividend growth; short- and long horizon predictability; VAR model; asymptotic and small-sample tests;

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References

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  1. Engsted, Tom & Tanggaard, Carsten, 2001. "The Danish stock and bond markets: comovement, return predictability and variance decomposition," Journal of Empirical Finance, Elsevier, vol. 8(3), pages 243-271, July.
  2. Ang, Andrew & Liu, Jun, 2007. "Risk, return, and dividends," Journal of Financial Economics, Elsevier, vol. 85(1), pages 1-38, July.
  3. Goetzman, W.N. & Jorion, P., 1992. "Testing the Predictive Power of Dividend Yields," Papers 93-03, Columbia - Graduate School of Business.
  4. John Y. Campbell & Tuomo Vuolteenaho, 2004. "Inflation Illusion and Stock Prices," NBER Working Papers 10263, National Bureau of Economic Research, Inc.
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  19. von Eije, Henk & Megginson, William L., 2008. "Dividends and share repurchases in the European Union," Journal of Financial Economics, Elsevier, vol. 89(2), pages 347-374, August.
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Citations

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Cited by:
  1. Guidolin, Massimo & McMillan, David G. & Wohar, Mark E., 2013. "Time varying stock return predictability: Evidence from US sectors," Finance Research Letters, Elsevier, vol. 10(1), pages 34-40.
  2. Engsted, Tom & Pedersen, Thomas Q. & Tanggaard, Carsten, 2012. "Pitfalls in VAR based return decompositions: A clarification," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1255-1265.
  3. Acker, Daniella & Duck, Nigel W., 2013. "Inflation illusion and the US dividend yield: Some further evidence," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 235-254.
  4. Tom Engsted & Thomas Q. Pedersen, 2008. "Return predictability and intertemporal asset allocation: Evidence from a bias-adjusted VAR model," CREATES Research Papers 2008-27, School of Economics and Management, University of Aarhus.
  5. Cheolbeom Park & Dong-hun Shin, 2014. "Stock Market Predictability: Global Evidence and an Explanation," Discussion Paper Series 1405, Institute of Economic Research, Korea University.
  6. Jesper Rangvid & Maik Schmeling & Andreas Schrimpf, 2010. "Dividend predictability around the world," CREATES Research Papers 2010-03, School of Economics and Management, University of Aarhus.
  7. Tom Engsted & Thomas Q. Pedersen, 2012. "Predicting returns and rent growth in the housing market using the rent-to-price ratio: Evidence from the OECD countries," CREATES Research Papers 2012-58, School of Economics and Management, University of Aarhus.
  8. Thomas Nitschka, 2014. "The Good? The Bad? The Ugly? Which news drive (co)variation in Swiss and US bond and stock excess returns?," Working Papers 2014-01, Swiss National Bank.

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