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Earnings, Dividend Policy, and Present Value Relations: Building Blocks of Dividend Policy Invariant Cash Flows

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  • Bruce N. Lehmann
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    Abstract

    In 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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    File URL: http://www.nber.org/papers/w3676.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3676.

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    Date of creation: Apr 1991
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    Publication status: published as RQFA, Vol. 3, no. 3 (1993): 263-282.
    Handle: RePEc:nbr:nberwo:3676

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    1. Ross, Stephen A, 1978. "A Simple Approach to the Valuation of Risky Streams," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 51(3), pages 453-75, July.
    2. Kenneth D. West, 1986. "A Specification Test for Speculative Bubbles," NBER Working Papers 2067, National Bureau of Economic Research, Inc.
    3. Terry A. Marsh and Robert C. Merton., 1986. "Dividend Behavior for the Aggregate Stock Market," Research Program in Finance Working Papers, University of California at Berkeley 163, University of California at Berkeley.
    4. Campbell, John & Shiller, Robert, 1987. "Cointegration and Tests of Present Value Models," Scholarly Articles 3122490, Harvard University Department of Economics.
    5. Mark Rubinstein, 1976. "The Valuation of Uncertain Income Streams and the Pricing of Options," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 7(2), pages 407-425, Autumn.
    6. Mankiw, N Gregory & Romer, David & Shapiro, Matthew D, 1985. " An Unbiased Reexamination of Stock Market Volatility," Journal of Finance, American Finance Association, American Finance Association, vol. 40(3), pages 677-87, July.
    7. Joe Mattey and Richard Meese., 1986. "Empirical Assessment of Present Value Relations," Research Program in Finance Working Papers, University of California at Berkeley 162, University of California at Berkeley.
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    Cited by:
    1. Campbell, John Y & Ammer, John, 1993. " What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 48(1), pages 3-37, March.

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