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Reevaluation on the Long-Run Price-Dividend and Price-Earnings Relation in Predicting Expected Return

Author

Listed:
  • Jonathan Ohn

    (Commonwealth University of Pennsylvania)

  • Jan Harren

    (University of Münster)

Abstract

We examine the relationship between (1) stock price and dividends and (2) stock price and earnings, and its role in forecasting expected returns for S&P 500 stocks. Johansen’s test reveals cointegration for both (1) between price and dividend and (2) between price and earnings, for the entire period, 1871–2023, and two subperiods, 1945–1990 and 1991–2023. The estimation results on autoregressive error-correction model with the price-dividend relation show a significant role of the cointegration relation in forecasting expected return of S&P 500 stocks for all periods, while the model with the price-earnings relation shows a significant role only in the period 1945–2023 when more than 80% of S&P 500 stocks and NYSE stocks consistently paid dividends. Contrary to Miller and Modigliani (Journal of Business :411-, 1961), dividends appear to significantly affect stock prices and firm value. The price-dividend relation appears to be consistently stronger and shows a more effective role in predicting expected return of S&P 500 stocks than the price-earnings relation.

Suggested Citation

  • Jonathan Ohn & Jan Harren, 2026. "Reevaluation on the Long-Run Price-Dividend and Price-Earnings Relation in Predicting Expected Return," Springer Proceedings in Business and Economics,, Springer.
    • Handle: RePEc:spr:prbchp:978-3-032-19314-8_5
    DOI: 10.1007/978-3-032-19314-8_5
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    Keywords

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    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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