Dividends And Stock Valuation: A Study From The Nineteenth To The Twenty-First Century (Page 7 of 45) in pdf

Dividends And Stock Valuation: A Study From The Nineteenth To The Twenty-First Century Page 7

specific to a few time periods (e.g. Goyal and Welch (2003)). As a result, there is uncertainty regarding

the importance one should give to dividends in the valuation of equities over time.

Similar to the mixed evidence regarding the predictive power for the dividend yield, researchers

have struggled to estimate the growth rate of dividends. Arnott and Bernstein (2002), for example,

provide an interesting historical perspective on the differences in how investors in the early 1900s viewed

dividends as compared to how they are viewed today. To handle some of these differences, dividend

growth rates have been modeled using a variety of different econometric models. For example, Bollerslev

and Hodrick (1995) and Donaldson and Kamstra (1996) use time-series models to predict dividend

behavior and find that a number of models do a reasonable job of explaining both changes in dividends

and changes in prices.

Despite the mixed evidence surrounding the value of the dividend-based valuation models and the

estimates of the dividends and their growth rates, empirical asset pricing models continue to include these

factors in their set of fundamental economic risk factors. This suggests that researchers continue to

believe these factors play a significant role in explaining the risk valued by investors. By studying what

influences the level and growth rate of dividends within the context of their relationship to the value of

the asset using dividend-based valuation techniques, our study provides new insights into what economic

risk factors should be included in asset pricing models.

2.2 Discount Rates and the Equity Premium

Previous studies have proposed a series of explanations for the relatively poor ability of asset

pricing models to explain the expected returns for equities. One of the most commonly proposed reasons

is the possible presence of a time-varying risk premium in the equities markets. To address this concern,

studies have employed a wide variety of different approaches. The approaches range from using GARCH

models to capture the time varying conditional volatility in betas within a CAPM framework (e.g.,

Bollerslev, Engle and Wooldridge (1988)) to using conditioning information to scale the estimated betas

in a multi-factor asset pricing model (e.g., Cochrane (1998)). Studies using these results have provided

Dividends And Stock Valuation: A Study From The Nineteenth To The Twenty-First Century Page 7