Disappearing Dividends: Implications for the Dividend-Price Ratio and Return Predictability

Chang-Jin Kim () and Cheolbeom Park

No 1205, Discussion Paper Series from Institute of Economic Research, Korea University

Abstract: The conventional dividend-price ratio is highly persistent, and the literature reports mixed evidence on its role in predicting stock returns. In particular, its predictive power seems to be sensitive to the choice of the sample period. We argue that the decreasing number of firms with traditional dividend-payout policy is responsible for these results, and develop a model in which the long-run relationship between the dividends and stock price is time-varying. An adjusted dividend-price ratio that accounts for the time-varying long-run relationship is stationary with considerably less persistence than the conventional dividend-price ratio. Furthermore, the predictive regression model that employs the adjusted dividend-price ratio as a regressor outperforms the random-walk model in terms of long-horizon out-of-sample predictability. These results are robust with respect to the firm size.

Keywords: Stock Return Predictability; Adjusted Dividend-price ratio; Disappearing; Dividends; Time-Varying Cointegration Vector (search for similar items in EconPapers)
JEL-codes: C12 C22 G12 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Disappearing Dividends: Implications for the Dividend-Price Ratio and Return Predictability (2013)
Journal Article: Disappearing Dividends: Implications for the Dividend–Price Ratio and Return Predictability (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:iek:wpaper:1205

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