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Earnings and Expected Returns

  • OWEN LAMONT

The aggregate dividend payout ratio forecasts excess returns on both stocks and corporate bonds in postwar U.S. data. High dividends forecast high returns. High earnings forecast low returns. The correlation of earnings with business conditions gives them predictive power for returns; they contain information about future returns that is not captured by other variables. Dividends and earnings contribute substantial explanatory power at short horizons. For forecasting long-horizon returns, however, only (scaled) stock prices matter. Forecasts of low long-horizon stock returns in the mid-1990s are caused not by earnings or dividends, but by high stock prices. Copyright The American Finance Association 1998.

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Paper provided by Center for Research in Security Prices, Graduate School of Business, University of Chicago in its series CRSP working papers with number 345.

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Handle: RePEc:wop:chispw:345
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