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Stock Market Predictability: Global Evidence and an Explanation

Cheolbeom Park and Dong-hun Shin ()
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Dong-hun Shin: Department of Economics, Korea University, Seoul, Republic of Korea

No 1405, Discussion Paper Series from Institute of Economic Research, Korea University

Abstract: Using a comprehensive dataset covering 34 countries from Datastream, we find that dividend-price ratio has a broad spectrum of forecasting abilities internationally. In some countries, such as the US, the dividend-price ratio is a powerful predictor of exclusively stock returns, whereas in others it is a powerful predictor of exclusively dividend growth rates. For many countries, however, the dividend-price ratio has some predictive power for both stock returns and dividend growth rates, although the relative degree of predictive power differs. We have provided an explanation for these differences in stock market predictabilities between countries. When a firm with a dominant shareholder is publicly traded, then the dominant shareholder determines cash-flow policy but the stochastic discount factor contained in the stock price may reflect the minority shareholders¡¯ stochastic discount factor. For this reason, the correlation between cash-flow and stochastic discount factor approaches zero as the disparity between voting rights and cash-flow rights increases. As a result, the stock price becomes more dependent on expected dividends than expected stock returns, and, therefore, the dividend-price ratio has a stronger predictive power for dividend growth. Consistent with our explanation, we find a strong positive relation between dividend growth predictability and disparity, but a significantly negative one between stock return predictability and disparity. These relations are found to be consistent across various robust tests.

Keywords: Dividend-price ratio; Stock returns; Dividend growth; Predictability; Disparity (search for similar items in EconPapers)
JEL-codes: E44 G12 G32 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-cfn, nep-fmk, nep-for and nep-mac
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