Dividends And Stock Valuation: A Study From The Nineteenth To The Twenty-First Century (Page 28 of 45) in pdf

Dividends And Stock Valuation: A Study From The Nineteenth To The Twenty-First Century Page 28

do start to decrease, as one would expect. If we assume that momentum increases throughout an

economic upswing, we expect momentum to still be increasing as we are approaching a future downturn

and thus a future decline in the dividends. We find a positive relationship between the term structure and

the growth rate. This suggests that the term structure may not be capturing the same relationship with the

economy that we were expecting or that there is more to the term structure. A decline in the short-term

interest rates may be a signal that the economy is currently in a bad state but the low short-term interest

rates actually signals a future increases in the economy and therefore future increases in the level of the

dividends.

For the growth rate as estimated using the growth rate in GNP we find fewer significant

relationships. We find that the growth rate appears to increase as the CPI increases and the momentum

factor increases. The growth rate increasing as the CPI increases could be both related to the fact that we

are using the nominal GNP so that it is merely related to the increase in inflation. Similarly the

relationship to momentum could simply be that momentum captures the trends in the economy and this is

exactly what the GNP is measuring as well. Finally the negative relationship with the P/E ratio is

interesting because it suggests that the trends in how investors are valuing earnings is negatively

correlated with the trends in the growth rate of the economy.

6. Conclusions

In this study we make several contributions to our understanding of how investors value financial

assets. By comparing the valuation one would have obtained using fundamental valuation methods and

the actual price for equity over a long period of time, our study complements the work in empirical asset

pricing which focuses on the relationship between asset returns and economic factors.

Since the

fundamental valuation methods require an estimate of the cost of equity and dividend growth rate at each

point in time, our study is able to investigate how these have changed over time and across economic

conditions.

Dividends And Stock Valuation: A Study From The Nineteenth To The Twenty-First Century Page 28