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Another look at the dividend-price relationship in the accounting valuation framework

Author

Listed:
  • Kathryn E. Easterday

    (Wright State University)

  • Pradyot K. Sen

    (University of WA—Bothell)

Abstract

We examine the association between dividends and price through the lens of the Ohlson (Contemp Account Res 11:661–687, 1995, Contemp Account Res 18:107–120, 2001) accounting valuation framework. Employing the price-level model and coefficient definitions detailed in Ohlson (Contemp Account Res 18:107–120, 2001), we show that in a properly specified pricing model a positive dividend coefficient does not violate Miller and Modigliani (J Bus 34:411–433, 1961), imply market irrationality, nor signify an informational role for dividends. Using a simple illustration, we explain the intuition behind the positive dividend coefficient. We also demonstrate that in the price-level model Ohlson’s “other information” variable νt, is better specified as the expected change in earnings—not just the earnings forecast. Our results hold through a number of robustness tests.

Suggested Citation

  • Kathryn E. Easterday & Pradyot K. Sen, 2023. "Another look at the dividend-price relationship in the accounting valuation framework," Review of Quantitative Finance and Accounting, Springer, vol. 61(3), pages 879-925, October.
    • Handle: RePEc:kap:rqfnac:v:61:y:2023:i:3:d:10.1007_s11156-023-01167-y
    DOI: 10.1007/s11156-023-01167-y
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    Keywords

    Dividends; Asset pricing; Ohlson model; Residual income valuation; Value-relevant; Information;
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    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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