Earnings Distribution and the Valuation of Shares: Some Recent Evidence**

James J. Diamond

Journal of Financial and Quantitative Analysis, 1967, vol. 2, issue 1, 15-30

Abstract: Questions have been raised in recent years concerning the interpretation of previous studies purporting to show that distributed earnings have had a consistently greater impact on equity prices than have retained earnings. Miller and Modigliani have convincingly argued that if capital markets are perfect and rational behavior of market participants is assumed, the price-earnings ratio of the shares of a firm with a given investment policy should be invariant to alternative earnings-payout ratios. They also point out, however, that with the present tax subsidy on capital gains and the existence of substantial brokerage fees and flotation costs, dividend policy might be expected to have an effect on share prices, even though the amount and direction of this effect is an empirical matter and not determinable a priori.

Date: 1967
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