Earnings, Dividend Policy, and Present Value Relations: Building Blocks of Dividend Policy Invariant Cash Flows
AbstractIn a Modigliani-Miller world, price equals the risk-adjusted present value of future dividends and dividend policy is irrelevant for asset pricing. This paper searches for cash flows with two characteristics: asset prices can be calculated from their present values and they are invariant with respect to dividend policy. Residual income measures with these features are identified under two assumptions: dividend policy does not alter risk premiums and income earned from investments associated with dividend policy includes capital gains and losses. These results hold for otherwise arbitrary risk premiums in the general no-arbitrage approach to the valuation of uncertain income streams.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3676.
Date of creation: Apr 1991
Date of revision:
Publication status: published as RQFA, Vol. 3, no. 3 (1993): 263-282.
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