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Dividends and Stock Valuation:

A Study From the Nineteenth to the Twenty-First Century

By:

Stephen R. Foerster and Stephen G. Sapp

Richard Ivey School of Business

The University of Western Ontario

London, Ontario, Canada, N6A 3K7

First Version: February 26, 2004

Current Version: May 28, 2005

Abstract

Using fundamental valuation techniques to determine the expected value of equities, we provide new

insights into how economic factors influence actual and expected equity values.

Specifically, we

investigate how changing economic conditions have impacted the relationship between the dividends paid

by firms in the S&P Composite Index and the value of the Index from 1871 to 2003. Since the use of

fundamental valuation techniques requires assumptions related to the cost of equity and dividend growth

rates, we also evaluate the sensitivity of these key assumptions to different economic conditions. We find

systematic differences in how investors value expected future dividend payments over time and across

economic conditions. Our results provide a new perspective for how changing economic conditions

influence the factors at the heart of how investors value assets.

JEL Codes: G21, G35

Paul Desmarais/London Life Faculty Fellowship in Finance (Foerster) and MBA Class of 1989 Faculty

Fellowship (Sapp). We thank Ming Dong, Jerry Mulcahy, Rick Robertson, Sergei Sarkissian, Ken

Snowden and seminar participants at McGill University, the University of Western Ontario and the NFA

2004 meetings for useful comments, and the Social Sciences and Humanities Research Council for

financial support. Please address all correspondence to Steve Foerster: Richard Ivey School of Business,

The University of Western Ontario, London, Ontario, Canada, N6A 3K7; Phone: 1-519-661-3726; Fax: 1-

519-661-3485; E-mail: sfoerster@ivey.uwo.ca.

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