Another look at the dividend-price relationship in the accounting valuation framework

Kathryn E. Easterday () and Pradyot K. Sen ()
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Kathryn E. Easterday: Wright State University
Pradyot K. Sen: University of WA—Bothell

Review of Quantitative Finance and Accounting, 2023, vol. 61, issue 3, No 4, 879-925

Abstract: Abstract We examine the association between dividends and price through the lens of the Ohlson (Contemp Account Res 11:661–687, 1995, Contemp Account Res 18:107–120, 2001) accounting valuation framework. Employing the price-level model and coefficient definitions detailed in Ohlson (Contemp Account Res 18:107–120, 2001), we show that in a properly specified pricing model a positive dividend coefficient does not violate Miller and Modigliani (J Bus 34:411–433, 1961), imply market irrationality, nor signify an informational role for dividends. Using a simple illustration, we explain the intuition behind the positive dividend coefficient. We also demonstrate that in the price-level model Ohlson’s “other information” variable νt, is better specified as the expected change in earnings—not just the earnings forecast. Our results hold through a number of robustness tests.

Keywords: Dividends; Asset pricing; Ohlson model; Residual income valuation; Value-relevant; Information (search for similar items in EconPapers)
JEL-codes: C52 G12 M40 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11156-023-01167-y

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