Present value model between prices and dividends with constant and time-varying expected returns: enterprise-level Brazilian stock market evidence from non-stationary panels

Edward Bernard Bastian de Rivera y Rivera, Diógenes Manoel Leiva Martin, Emerson Marçal and Leonardo Fernando Cruz Basso
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Edward Bernard Bastian de Rivera y Rivera: Mackenzie University
Diógenes Manoel Leiva Martin: Analyst at Central Bank of Brazil
Leonardo Fernando Cruz Basso: Mackenzie University
Authors registered in the RePEc Author Service: Edward Rivera Rivera

Brazilian Business Review, 2012, vol. 9, issue 4, 51-86

Abstract: The Present Value Model (PVM) – in which current security prices depend upon the present value of future discounted dividends, where the discount rate is equivalent to the required rate of return – is one of the long-standing principles of Finance Theory. The objective of this work is to analyze the validity of the PVM between prices and dividends at the firm level from panel techniques applied to non-stationary and potentially cointegrated processes for the Brazilian stock market. Considering the Present Value Model with Constant and Time-Varying Expected Returns, the evidence that real (log) prices and real (log) dividends are non-stationary I(1) and (log) price-dividend ratio is I(0) cannot be rejected. Regarding FMOLS and DOLS estimators for panel cointegration models, stock prices are found to be overvalued under either constant or time-varying expected returns assumption.

Keywords: Present value model; unit root; cointegration; non-stationary panels. (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:bbz:fcpbbr:v:9:y:2012:i:4:p:51-86

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