POTENTIAL DIVIDENDS AND ACTUAL CASH FLOWS IN EQUITY VALUATION. A CRITICAL ANALYSIS

Ignacio Velez-Pareja () and Carlo Alberto Magni

Estudios Gerenciales, 2009

Abstract: Practitioners and most academics in valuation include changes in liquid assets (potential dividends) in the cash flows. This widespread and wrong practice is inconsistent with basic finance theory. We present economic, theoretical, and empirical arguments to support the thesis. Economic arguments underline that only flows of cash should be considered for valuation; theoretical arguments show how potential dividends lead to contradiction and to arbitrage losses. Empirical arguments, from recent studies, suggest that investors discount potential dividends with high discount rates, which means thatchanges in liquid assets are not value drivers. Hence, when valuing cash flows, we should consider only actual payments.

Keywords: Cash flow to equity; potential dividends; equity value. (search for similar items in EconPapers)
JEL-codes: G12 G31 M41 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:col:000129:006870

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