Abstract
We investigate a consumption-based present-value relation that is a function of future dividend growth and find that changing forecasts of dividend growth are an important feature of the post-war U.S. stock market, despite the failure of the dividend-price ratio to uncover such variation. In addition, dividend forecasts are found to covary with changing forecasts of excess stock returns over business cycle frequencies. This covariation is important because positively correlated fluctuations in expected dividend growth and expected returns have offsetting effects on the log dividend-price ratio. The market risk premium and expected dividend growth thus vary considerably more than is apparent using the log divided-price ratio alone as a predictive variable.
Original language | English (US) |
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Pages (from-to) | 583-626 |
Number of pages | 44 |
Journal | Journal of Financial Economics |
Volume | 76 |
Issue number | 3 |
DOIs | |
State | Published - Jun 2005 |
Keywords
- Cash-flow predictability
- Dividend growth
- Return predictability
- Risk premia
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics
- Strategy and Management