An Alternative to the Pure Dividend Discount Model
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“Dividend Policy and Share Price Volatility”
“Dividend policy and share price volatility” Sew Eng Hooi AUTHORS Mohamed Albaity Ahmad Ibn Ibrahimy Sew Eng Hooi, Mohamed Albaity and Ahmad Ibn Ibrahimy (2015). Dividend ARTICLE INFO policy and share price volatility. Investment Management and Financial Innovations, 12(1-1), 226-234 RELEASED ON Tuesday, 07 April 2015 JOURNAL "Investment Management and Financial Innovations" FOUNDER LLC “Consulting Publishing Company “Business Perspectives” NUMBER OF REFERENCES NUMBER OF FIGURES NUMBER OF TABLES 0 0 0 © The author(s) 2021. This publication is an open access article. businessperspectives.org Investment Management and Financial Innovations, Volume 12, Issue 1, 2015 Sew Eng Hooi (Malaysia), Mohamed Albaity (Malaysia), Ahmad Ibn Ibrahimy (Malaysia) Dividend policy and share price volatility Abstract The objective of this study is to examine the relationship between dividend policy and share price volatility in the Malaysian market. A sample of 319 companies from Kuala Lumpur stock exchange were studied to find the relationship between stock price volatility and dividend policy instruments. Dividend yield and dividend payout were found to be negatively related to share price volatility and were statistically significant. Firm size and share price were negatively related. Positive and statistically significant relationships between earning volatility and long term debt to price volatility were identified as hypothesized. However, there was no significant relationship found between growth in assets and price volatility in the Malaysian market. Keywords: dividend policy, share price volatility, dividend yield, dividend payout. JEL Classification: G10, G12, G14. Introduction (Wang and Chang, 2011). However, difference in tax structures (Ho, 2003; Ince and Owers, 2012), growth Dividend policy is always one of the main factors and development (Bulan et al., 2007; Elsady et al., that an investor will focus on when determining 2012), governmental policies (Belke and Polleit, 2006) their investment strategy. -
Equity-Bond Yield Correlation and the FED Model: Evidence of Switching Behaviour from the G7 Markets
This is a post-peer-review, pre-copyedit version of an article published in Journal of Asset Management. The final authenticated version is available online at: https://doi.org/10.1057/s41260- 018-0091-x Equity-Bond Yield Correlation and the FED Model: Evidence of Switching Behaviour from the G7 Markets February 2018 Revised April 2018 This Version June 2018 Abstract This paper considers how the strength and nature of the relation between the equity and bond yield varies with the level of the real bond yield. We demonstrate that at low levels of the real bond yield, the correlation between the equity and bond yields turns negative. This arises as the lower bond yield implies heightened macroeconomic risk (e.g., deflation and economic stagnation) and causes equity and bond prices to move in opposite directions. The FED model relies on a positive relation for its success in predicting future returns. Thus, we argue that the mixed empirical evidence regarding the FED model arises due to this switch in correlation behaviour. We present supportive evidence for the switching relation and its link to the level of the bond yield using linear and non-linear smooth transition panel regression techniques for the G7 markets. The results presented here should be of interest to market practitioners who may wish to use the FED model to aid market timing decisions and for academics interested in understanding the interrelations between markets. Keywords: Equity Returns, Bond Returns, Correlation, Bond Yield, Switching JEL: C22, C23, E44, G12, G15 1 1. Introduction. The FED model implies a positive relation between the equity and bond yields. -
Dividend Policy in the Absence of Taxes
Dividend Policy in the Absence of Taxes Khamis Al-Yahyaee, Toan Pham*, and Terry Walter School of Banking and Finance, University of New South Wales Abstract We examine dividend policy in Oman, this being a unique environment where firms distribute almost 100% of their profits as dividends, and where firms are highly levered through bank loans, thus reducing the role of dividends in agency cost mitigation. We find that profitability, size and business risk are factors that determine dividend policy of both financial and non- financial firms. Government ownership, leverage and age have a significant impact on the dividend policy of non-financial firms but no effect on financial firms. The factors that influence the probability of paying dividends are the same factors that determine the amount of dividends paid for both financial and non-financial firms. Our results also show that agency costs mitigation is not a critical driver of dividend policy of Omani firms. Finally, we apply the Lintner (1956) model and find that non-financial firms adopt policies that smooth dividends, whereas financial firms do not have stable dividend policies. JEL Classification: G35 Keywords: dividends, taxes, agency theory December 2006 * Corresponding author. E-mail address: [email protected]. School of Banking and Finance, University of New South Wales, Sydney, 2052 Australia. Phone: +61 2 9385 5869 Fax: +61 2 9385 6347 1. Introduction “Although a number of theories have been put forward in the literature to explain their pervasive presence, dividends remain one of the thorniest puzzles in corporate finance” (Allen, Bernardo, and Welch (2000, p.2499)) The question of “Why do corporations pay dividends?” has puzzled researchers for many years. -
The Predictive Ability of the Bond-Stock Earnings Yield Differential Model
The Predictive Ability of the Bond-Stock Earnings Yield Differential Model KLAUS BERGE,GIORGIO CONSIGLI, AND WILLIAM T. ZIEMBA FORMAT ANY IN KLAUS BERGE he Federal Reserve (Fed) model prices and stock indices has been studied by is a financial controller provides a framework for discussing Campbell [1987, 1990, 1993]; Campbell and for Allianz SE in Munich, stock market over- and undervalu- Shiller [1988]; Campbell and Yogo [2006]; Germany. [email protected] ation. It was introduced by market Fama and French [1988a, 1989]; Goetzmann Tpractitioners after Alan Greenspan’s speech on and Ibbotson [2006]; Jacobs and Levy [1988]; GIORGIO CONSIGLI the market’s irrational exuberance in ARTICLELakonishok, Schleifer, and Vishny [1994]; Polk, is an associate professor in November 1996 as an attempt to understand Thompson, and Vuolteenaho [2006], and the Department of Mathe- and predict variations in the equity risk pre- Ziemba and Schwartz [1991, 2000]. matics, Statistics, and Com- mium (ERP). The model relates the yield on The Fed model has been successful in puter Science at the THIS University of Bergamo stocks (measured by the ratio of earnings to predicting market turns, but in spite of its in Bergamo, Italy. stock prices) to the yield on nominal Treasury empirical success and simplicity, the model has [email protected] bonds. The theory behind the Fed model is been criticized. First, it does not consider the that an optimal asset allocation between stocks role played by time-varying risk premiums in WILLIAM T. Z IEMBA and bonds is related to their relative yields and the portfolio selection process, yet it does con- is Alumni Professor of Financial Modeling and when the bond yield is too high, a market sider a risk-free government interest rate as the Stochastic Optimization, adjustment is needed resulting in a shift out of discount factor of future earnings. -
Dividend Valuation Models Prepared by Pamela Peterson Drake, Ph.D., CFA
Dividend valuation models Prepared by Pamela Peterson Drake, Ph.D., CFA Contents 1. Overview ..................................................................................................................................... 1 2. The basic model .......................................................................................................................... 1 3. Non-constant growth in dividends ................................................................................................. 5 A. Two-stage dividend growth ...................................................................................................... 5 B. Three-stage dividend growth .................................................................................................... 5 C. The H-model ........................................................................................................................... 7 4. The uses of the dividend valuation models .................................................................................... 8 5. Stock valuation and market efficiency ......................................................................................... 10 6. Summary .................................................................................................................................. 10 7. Index ........................................................................................................................................ 11 8. Further readings ....................................................................................................................... -
A Theory of Speculative Bubbles, the Fed Model, and Self-Fulfilling
Monetary Exchange in Over-the-Counter Markets: A Theory of Speculative Bubbles, the Fed Model, and Self-fulfilling Liquidity Crises Ricardo Lagos∗ Shengxing Zhangy New York University London School of Economics September 2014 Abstract We develop a model of monetary exchange in over-the-counter markets to study the ef- fects of monetary policy on asset prices and standard measures of financial liquidity, such as bid-ask spreads, trade volume, and the incentives of dealers to supply immediacy, both by participating in the market-making activity and by holding asset inventories on their own account. The theory predicts that asset prices carry a speculative premium that reflects the asset's marketability and depends on monetary policy as well as the microstructure of the market where it is traded. These liquidity considerations imply a positive correlation between the real yield on stocks and the nominal yield on Treasury bonds|an empirical observation long regarded anomalous. The theory also exhibits rational expectations equi- libria with recurring belief driven events that resemble liquidity crises, i.e., times of sharp persistent declines in asset prices, trade volume, and dealer participation in market-making activity, accompanied by large increases in spreads and abnormally long trading delays. Keywords: Money; Liquidity; OTC markets; Asset prices; Fed model; Financial crises JEL classification: D83, E31, E52, G12 ∗Lagos thanks the support from the C.V. Starr Center for Applied Economics at NYU. yZhang thanks the support from the Centre -
Advances in Nowcasting Economic Activity: Secular Trends, Large Shocks and New Data∗
Advances in Nowcasting Economic Activity: Secular Trends, Large Shocks and New Data∗ Juan Antol´ın-D´ıaz Thomas Drechsel Ivan Petrella London Business School University of Maryland Warwick Business School, CEPR June 14, 2021 Abstract A key question for households, firms, and policy makers is: how is the economy doing now? We develop a Bayesian dynamic factor model and compute daily estimates of US GDP growth. Our framework gives prominence to features of modern business cycles absent in linear Gaussian models, including movements in long-run growth, time-varying uncertainty, and fat tails. We also incorporate newly available high-frequency data on consumer behavior. The model beats benchmark econometric models and survey expectations at predicting GDP growth over two decades, and advances our understanding of macroeconomic data during the COVID-19 pandemic. Keywords: Nowcasting; Daily economic index; Dynamic factor models; Real-time data; Bayesian Methods; Fat Tails; Covid-19 Recession. JEL Classification Numbers: E32, E23, O47, C32, E01. ∗We thank seminar participants at the NBER-NSF Seminar in Bayesian Inference in Econometrics and Statistics, the ASSA Big Data and Forecasting Session, the World Congress of the Econometric Society, the Barcelona Summer Forum, the Bank of England, Bank of Italy, Bank of Spain, Bank for International Settlements, Norges Bank, the Banque de France PSE Work- shop on Macroeconometrics and Time Series, the CFE-ERCIM in London, the DC Forecasting Seminar at George Washington University, the EC2 Conference on High-Dimensional Modeling in Time Series, Fulcrum Asset Management, IHS Vienna, the IWH Macroeconometric Workshop on Forecasting and Uncertainty, and the NIESR Workshop on the Impact of the Covid-19 Pandemic on Macroeconomic Forecasting. -
How Do Underwriters Value Initial Public Offerings?: an Empirical Analysis of the French IPO Market
How Do Underwriters Value Initial Public Offerings?: An Empirical Analysis of the French IPO Market Peter Roosenboom* RSM Erasmus University JEL classification: G24, G32 Keywords: Initial public offerings, valuation * Corresponding author. The usual disclaimer applies. Correspondence address: Department of Financial Management, Rotterdam School of Management, Erasmus University Rotterdam, PO Box 1738, 3000 DR Rotterdam, The Netherlands. Phone: +31 10 408 1255, Fax: +31 10 408 9017, Email: [email protected]. I thank Martine Cools, Tjalling van der Goot, Frank Hartmann, Abe de Jong, Gerard Mertens, Peter Pope, Willem Schramade, Jeroen Suijs and Frank Verbeeten and several anonymous underwriters for their helpful suggestions. How Do Underwriters Value Initial Public Offerings?: An Empirical Analysis of the French IPO Market Abstract This paper investigates how French underwriters value the stocks of companies they bring public. Underwriters often use several valuation methods to determine their fair value estimate of the IPO firm’s equity. We investigate five of these valuation methods: peer group multiples valuation, the dividend discount model, the discounted cash flow model, the economic value added method, and underwriter-specific methods. We document that underwriters base their choice for a particular valuation method on firm characteristics, aggregate stock market returns and aggregate stock market volatility in the period before the IPO. In addition, we examine how underwriters combine the value estimates of the valuation methods they use into a fair value estimate by assigning weights to these value estimates. We document that these weights also depend on firm-specific factors, aggregate stock market returns and aggregate stock market volatility. Finally, we document that underwriters discount their fair value estimate to set the preliminary offer price of the shares. -
Monthly Bulletin November 2008 87 the Article Is Structured As Follows
VALUING STOCK MARKETS AND THE EQUITY RISK PREMIUM ARTICLES The purpose of this article is to present a framework for valuing stock markets. Since any yardstick Valuing stock markets aimed at valuing stock markets is surrounded by a large degree of uncertainty, it is advisable to use and the equity a broad range of measures. The article starts out by discussing how stock prices are determined and risk premium why they may deviate from a rational valuation. Subsequently, several standard valuation metrics are derived, presented and discussed on the basis of euro area data. 1 INTRODUCTION for monetary analysis, because of the interplay between the return on money and the return on Stock prices may contain relevant, timely other fi nancial assets, including equity. and original information for the assessment of market expectations, market sentiment, However, the information content of stock prices fi nancing conditions and, ultimately, the with regard to future economic activity is likely outlook for economic activity and infl ation. to vary over time. Stock prices can occasionally More specifi cally, stock prices play an active drift to levels that are not considered to be and passive role in the monetary transmission consistent with what a fundamental valuation process. The active role is most evident via would suggest. For example, this can occur in wealth and cost of capital effects. For example, times of great unrest in fi nancial markets, during as equity prices rise, share-owning households which participants may overreact to bad news become wealthier and may choose to increase and thus push stock prices below fundamental their consumption. -
15.401 Finance Theory I, Equities
15.401 15.40115.401 FinanceFinance TheoryTheory MIT Sloan MBA Program Andrew W. Lo Harris & Harris Group Professor, MIT Sloan School Lecture 7: Equities © 2007–2008 by Andrew W. Lo Critical Concepts 15.401 Industry Overview The Dividend Discount Model DDM with Multiple-Stage Growth EPS and P/E Growth Opportunities and Growth Stocks Reading Brealey, Myers and Allen, Chapter 4 © 2007–2008 by Andrew W. Lo Lecture 7: Equities Slide 2 Industry Overview 15.401 What Is Common Stock? Equity, an ownership position, in a corporation Payouts to common stock are dividends, in two forms: – Cash dividends – Stock dividends Unlike bonds, payouts are uncertain in both magnitude and timing Equity can be sold (private vs. public equity) Key Characteristics of Common Stock: Residual claimant to corporate assets (after bondholders) Limited liability Voting rights Access to public markets and ease of shortsales © 2007–2008 by Andrew W. Lo Lecture 7: Equities Slide 3 Industry Overview 15.401 The Primary Market (Underwriting) Venture capital: A company issues shares to special investment partnerships, investment institutions, and wealthy individuals Initial public offering (IPO): A company issues shares to the general public for the first time (i.e., going public) Secondary or seasoned equity offerings (SEO): A public company issues additional shares Stock issuance to the general public is usually organized by an investment bank who acts as an underwriter: it buys part or all of the issue and resells it to the public Secondary Market (Resale Market) Organized exchanges: NYSE, AMEX, NASDAQ, etc. Specialists, broker/dealers, and electronic market-making (ECNs) OTC: NASDAQ © 2007–2008 by Andrew W. -
Corporate Finance Lecture Note Packet 2 Capital Structure, Dividend Policy and Valuation
Aswath Damodaran 1 CORPORATE FINANCE LECTURE NOTE PACKET 2 CAPITAL STRUCTURE, DIVIDEND POLICY AND VALUATION Aswath Damodaran Spring 2016 Aswath Damodaran 2 CAPITAL STRUCTURE: THE CHOICES AND THE TRADE OFF “Neither a borrower nor a lender be” Someone who obviously hated this part of corporate finance First principles 3 Aswath Damodaran 3 The Choices in Financing 4 ¨ There are only two ways in which a business can raise money. ¤ The first is debt. The essence of debt is that you promise to make fixed payments in the future (interest payments and repaying principal). If you fail to make those payments, you lose control of your business. ¤ The other is equity. With equity, you do get whatever cash flows are left over after you have made debt payments. Aswath Damodaran 4 Global Patterns in Financing… 5 Aswath Damodaran 5 And a much greater dependence on bank loans outside the US… 6 Aswath Damodaran 6 Assessing the existing financing choices: Disney, Vale, Tata Motors, Baidu & Bookscape 7 Aswath Damodaran 7 8 The Transitional Phases.. 9 ¨ The transitions that we see at firms – from fully owned private businesses to venture capital, from private to public and subsequent seasoned offerings are all motivated primarily by the need for capital. ¨ In each transition, though, there are costs incurred by the existing owners: ¤ When venture capitalists enter the firm, they will demand their fair share and more of the ownership of the firm to provide equity. ¤ When a firm decides to go public, it has to trade off the greater access to capital markets against the increased disclosure requirements (that emanate from being publicly lists), loss of control and the transactions costs of going public. -
BUBBLE LOGIC at FIVE YEARS OLD Our Bouncing Baby Bubble Is Growing Up
BUBBLE LOGIC AT FIVE YEARS OLD Our Bouncing Baby Bubble Is Growing Up Clifford S. Asness AQR Capital Management, LLC The views and opinions expressed herein are those of the presenter and do not necessarily reflect the views of AQR Capital Management, its affiliates, or its employees. The information set forth herein has been obtained or derived from sources believed by AQR Capital Management, LLC (“AQR”) to be reliable. However, AQR does not make any representation or warranty, express or implied, as to the information’s accuracy or completeness, nor does AQR recommend that the attached information serve as the basis of any investment decision. This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such. This document is intended exclusively for the use of the person to whom it has been delivered by AQR Capital Management, LLC, and it is not to be reproduced or redistributed to any other person. Introduction ¾ This presentation is based on three papers, some very bad poetry, and liberal borrowing from smart people: • Bubble Logic (working paper June 2000) • Surprise! Higher Dividends = Higher Earnings Growth (FAJ 2003) • Fight the Fed Model (JPM 2003) • Bubble Reloaded (AQR Quarterly Letter 4Q 2003) ¾ The goal is to examine the prospects for long-term stock returns from here. ¾ The conclusion is that because of still very high valuations the prospects are for far lower than normal long-term returns in nominal terms, vs.