TY - JOUR
T1 - Expected returns and expected dividend growth
AU - Lettau, Martin
AU - Ludvigson, Sydney C.
N1 - Funding Information:
Lettau acknowledges financial support from the National Science Foundation. Ludvigson acknowledges financial support from the Alfred P. Sloan Foundation, from the National Science Foundation and the CV Starr Center for Applied Economics (NYU). This material is based upon work supported by the National Science Foundation under Grant No. 0224944. We thank Jushan Bai, John Y. Campbell, Kenneth French, Mark Gertler, Jonathan Lewellen, Anthony Lynch, Lucrezia Reichlin, Peter Schotman, William Schwert (the editor), Charles Steindel, Ross Valkanov, Charles Whiteman, an anonymous referee, and seminar participants at Duke University, INSEAD, London Business School, London School of Economics, Ohio State University, the New School for Social Research, New York University, SUNY Albany, the University of Iowa, the University of Maryland, the University of Montreal, Yale, the SITE 2001 summer conference, the CEPR Summer 2002 Finance Symposium and the 2003 American Finance Association meetings for helpful comments, and Nathan Barczi for excellent research assistance. Any errors or omissions are the responsibility of the authors, and do not necessarily reflect the views of the National Science Foundation.
PY - 2005/6
Y1 - 2005/6
N2 - 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.
AB - 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.
KW - Cash-flow predictability
KW - Dividend growth
KW - Return predictability
KW - Risk premia
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U2 - 10.1016/j.jfineco.2004.05.008
DO - 10.1016/j.jfineco.2004.05.008
M3 - Article
AN - SCOPUS:19144370592
SN - 0304-405X
VL - 76
SP - 583
EP - 626
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 3
ER -