IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

The dividend-price ratio does predict dividend growth: International evidence

  • Tom Engsted

    ()

    (School of Economics and Management, University of Aarhus and CREATES)

  • Thomas Q. Pedersen

    ()

    (School of Economics and Management, University of Aarhus and CREATES)

Unpredictable dividend growth by the dividend-price ratio is considered a 'stylized fact' in post war US data. Using long-term data, covering more than 80 years from the US and three European countries, we revisit this stylized fact, and we also report results on return predictability. We find large cross-country differences regarding return and dividend growth predictability. For the US, we confirm Chen's (2008) finding of a 'tale of two periods' but with the important difference that short- and long-horizon real returns are significantly predictable in both sub-periods (1871-1949 and 1950-2008), while long-horizon real dividend growth is unpredictable in the early period and significantly predictable in the 'wrong' direction in the post war period. These results are directly opposite to those reported by Chen using nominal returns and dividend growth. For the UK, the results are more or less similar to those for the US. For Sweden and Denmark we find no evidence of return predictability, but strong evidence of predictable dividend growth in the 'right' direction on both short and long horizons and over both the full sample periods and the post war period. We also document that implied long-horizon coefficients from VAR's often differ substantially from direct estimates in multi-year regressions. Throughout, we report both standard asymptotic tests and simulated small-sample tests and, following Cochrane (2008), we investigate the joint distribution of dividend-price ratio coefficients in return and dividend growth regressions.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: ftp://ftp.econ.au.dk/creates/rp/09/rp09_36.pdf
Download Restriction: no

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2009-36.

as
in new window

Length: 38
Date of creation: 23 Jul 2009
Date of revision:
Handle: RePEc:aah:create:2009-36
Contact details of provider: Web page: http://www.econ.au.dk/afn/

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. John H. Cochrane, 2006. "The Dog That Did Not Bark: A Defense of Return Predictability," NBER Working Papers 12026, National Bureau of Economic Research, Inc.
  2. Lettau, Martin & Ludvigson, Sydney C., 2005. "Expected returns and expected dividend growth," Journal of Financial Economics, Elsevier, vol. 76(3), pages 583-626, June.
  3. Valkanov, Rossen, 2003. "Long-horizon regressions: theoretical results and applications," Journal of Financial Economics, Elsevier, vol. 68(2), pages 201-232, May.
  4. Goetzmann, William N & Jorion, Philippe, 1995. "A Longer Look at Dividend Yields," The Journal of Business, University of Chicago Press, vol. 68(4), pages 483-508, October.
  5. John Y. Campbell & Robert J. Shiller, 1988. "Interpreting Cointegrated Models," NBER Working Papers 2568, National Bureau of Economic Research, Inc.
  6. Lewellen, Jonathan, 2004. "Predicting returns with financial ratios," Journal of Financial Economics, Elsevier, vol. 74(2), pages 209-235, November.
  7. Ang, Andrew & Liu, Jun, 2005. "Risk, Return and Dividends," University of California at Los Angeles, Anderson Graduate School of Management qt1s25177n, Anderson Graduate School of Management, UCLA.
  8. Long Chen & Zhi Da & Richard Priestley, 2012. "Dividend Smoothing and Predictability," Management Science, INFORMS, vol. 58(10), pages 1834-1853, October.
  9. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
  10. Fama, Eugene F. & French, Kenneth R., 2001. "Disappearing dividends: changing firm characteristics or lower propensity to pay?," Journal of Financial Economics, Elsevier, vol. 60(1), pages 3-43, April.
  11. Andres, Christian & Betzer, André & Goergen, Marc & Renneboog, Luc, 2009. "Dividend policy of German firms: A panel data analysis of partial adjustment models," Journal of Empirical Finance, Elsevier, vol. 16(2), pages 175-187, March.
  12. John Y. Campbell & Tuomo Vuolteenaho, 2004. "Inflation Illusion and Stock Prices," American Economic Review, American Economic Association, vol. 94(2), pages 19-23, May.
  13. John Y. Campbell & Motohiro Yogo, 2002. "Efficient Tests of Stock Return Predictability," Harvard Institute of Economic Research Working Papers 1972, Harvard - Institute of Economic Research.
  14. Goetzmann, W.N., 1990. "Testing The Predictive Power Of Dividend Yields," Papers fb-_90-12, Columbia - Graduate School of Business.
  15. Campbell, John Y., 2003. "Consumption-based asset pricing," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 13, pages 803-887 Elsevier.
  16. Chen, Long, 2009. "On the reversal of return and dividend growth predictability: A tale of two periods," Journal of Financial Economics, Elsevier, vol. 92(1), pages 128-151, April.
  17. Lior Menzly & Tano Santos & Pietro Veronesi, 2004. "Understanding Predictability," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 1-47, February.
  18. Engsted, Tom & Tanggaard, Carsten, 2001. "The Danish stock and bond markets: comovement, return predictability and variance decomposition," Journal of Empirical Finance, Elsevier, vol. 8(3), pages 243-271, July.
  19. Renneboog, L.D.R. & Trojanowski, G., 2005. "Control Structures and Payout Policy," Discussion Paper 2005-014, Tilburg University, Tilburg Law and Economic Center.
  20. Marsh, Terry A & Merton, Robert C, 1987. "Dividend Behavior for the Aggregate Stock Market," The Journal of Business, University of Chicago Press, vol. 60(1), pages 1-40, January.
  21. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-86.
  22. Jules H. van Binsbergen & Ralph S.J. Koijen, 2010. "Predictive Regressions: A Present-value Approach," NBER Working Papers 16263, National Bureau of Economic Research, Inc.
  23. Paye, Bradley S. & Timmermann, Allan, 2006. "Instability of return prediction models," Journal of Empirical Finance, Elsevier, vol. 13(3), pages 274-315, June.
  24. Stambaugh, Robert F., 1999. "Predictive regressions," Journal of Financial Economics, Elsevier, vol. 54(3), pages 375-421, December.
  25. N. Gregory Mankiw & Jeffrey A. Miron, 1985. "The Changing Behavior of the Term Structure of Interest Rates," NBER Working Papers 1669, National Bureau of Economic Research, Inc.
  26. Andrew Ang & Geert Bekaert, 2001. "Stock Return Predictability: Is it There?," NBER Working Papers 8207, National Bureau of Economic Research, Inc.
  27. Lund, Jesper & Engsted, Tom, 1996. "GMM and present value tests of the C-CAPM: evidence from the Danish, German, Swedish and UK stock markets," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 497-521, August.
  28. von Eije, Henk & Megginson, William L., 2008. "Dividends and share repurchases in the European Union," Journal of Financial Economics, Elsevier, vol. 89(2), pages 347-374, August.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:aah:create:2009-36. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.