Disappearing Dividends: Implications for the Dividend-Price Ratio and Return Predictability
AbstractThe conventional dividend-price ratio is highly persistent, and the literature reports mixed evidence on its role in predicting stock returns. In particular, its predictive power seems to be sensitive to the choice of the sample period. We argue that the decreasing number of firms with traditional dividend-payout policy is responsible for these results, and develop a model in which the long-run relationship between the dividends and stock price is time-varying. An adjusted dividend-price ratio that accounts for the time-varying long-run relationship is stationary with considerably less persistence than the conventional dividend-price ratio. Furthermore, the predictive regression model that employs the adjusted dividend-price ratio as a regressor outperforms the random-walk model in terms of long-horizon out-of-sample predictability. These results are robust with respect to the firm size.
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Bibliographic InfoPaper provided by Institute of Economic Research, Korea University in its series Discussion Paper Series with number 1205.
Date of creation: 2012
Date of revision:
Stock Return Predictability; Adjusted Dividend-price ratio; Disappearing; Dividends; Time-Varying Cointegration Vector;
Other versions of this item:
- 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, vol. 45, pages 933-952, 08.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
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