Revisiting the Long-Run Dynamic Linkage between Dividends and Share Price with Advanced Panel Econometrics Techniques

Sudatta Bharati Mohapatra () and Nirmal Chandra Kar
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Sudatta Bharati Mohapatra: Department of Business Administration, Utkal University, Bhubaneswar 751004, India
Nirmal Chandra Kar: Department of Business Administration, Utkal University, Bhubaneswar 751004, India

JRFM, 2022, vol. 15, issue 10, 1-19

Abstract: The log-linearized present value model (PVM) has been widely used in corporate finance to understand the long-run relationship between share price and dividends using panel data. However, the application of recently established panel econometric approaches that account for slope heterogeneity and cross-section dependency in the recent literature regarding the long-run link between share price and dividends in an Indian setting is limited. This paper re-examines the log-linearized PVM in an Indian setting using newly developed panel unit root, cointegration, and long-run dynamic estimation approaches. This study employed a panel dataset of 60 Bombay Stock Exchange (BSE)-listed Indian firms paying regular dividends for 28 years (1990–2017). The study found unit root, cointegration, and a long-run relationship between dividend and share price series for Indian firms during a 28-year sample period. By demonstrating the presence of a long-run link between share price and dividends, this paper contributes to the literature on the PVM, which is crucial in comprehending market rationality and share price behavior in India. This paper also discusses issues related to panel data, such as cross-section dependency and slope heterogeneity, as well as panel econometric approaches that can be applied in the appropriate settings.

Keywords: log-linearized present value model; share price; dividends; Indian firms; long-run relationship; second-generation panel unit root and cointegration tests; dynamic CCEMG model (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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