Stock Prices,Earnings, and Expected Dividends

Long historical averages of real earnings help forecast present values of future real dividends. With aggregate U.S. stock market data (1871–1986), a vector-autoregressive forecast of the present value of future dividends is, for each year, roughly a weighted average of moving-average earnings and current real price, with between two thirds and three fourths of the weight on the earnings measure. We develop the implications of this for the present-value model of stock prices and for recent results that long-horizon stock returns are highly forecastable.     

Size and Book-to-Market Factors in Earnings and Returns

We study whether the behavior of stock prices, in relation to size and book-to-market-equity (BE/ME), reflects the behavior of earnings. Consistent with rational pricing, high BE/ME signals persistent poor earnings and low BE/ME signals strong earnings. Moreover, stock prices forecast the reversion of earnings growth observed after firms are ranked on size and BE/ME. Finally, there are market, size, and BE/ME factors in earnings like those in returns. The market and size factors in earnings help explain those in returns, but we find no link between BE/ME factors in earnings and returns.     

Expectations and the Cross-Section of Stock Returns

Previous research has shown that stocks with low prices relative to book value, cash flow, earnings, or dividends (that is, value stocks) earn high returns. Value stocks may earn high returns because they are more risky. Alternatively, systematic errors in expectations may explain the high returns earned by value stocks. I test for the existence of systematic errors using survey data on forecasts by stock market analysts. I show that investment strategies that seek to exploit errors in analysts' forecasts earn superior returns because expectations about future growth in earnings are too extreme.     

Personal taxes and the time variation of stock returns – evidence from the UK

A potential explanation for the time-series predictability of market returns with dividend yields is the differential tax treatment of capital gains and dividends. This article investigates to what extent the predictability of long-horizon returns can be explained by this tax effect. Assuming that after-tax expected returns are constant, we test the derived relationships between pretax returns and lagged dividend yields with UK data. We also compare the predictability of before-tax long-horizon returns with that of after-tax returns. The results indicate that the tax treatment of dividends does not significantly contribute towards the predictability of stock returns.     

ARE LONG-HORIZON STOCK RETURNS PREDICTABLE? A BOOTSTRAP ANALYSIS

This paper examines empirical evidence of predictability of long-horizon real and excess stock returns in the UK using univariate as well as multivariate Variance Ratio tests. In order to estimate the sampling distribution of the test statistics, artificial histories ofstock returns are generated from their empirical distribution using the bootstrap method. This allows the construction of significance levels of the test statistic which are free from distributional assumptions. The empirical results indicate that there is no evidence of mean reversion in stock prices even if a wider information set to forecast stock returns is used and that the significance of historical Variance Ratio statistics has been overstated by previous studies.     

Stock dividends in China: signalling or liquidity explanations?

We test alternative hypotheses on a sample of Chinese stock dividends. The inverse Mills ratio, a signal about future performance, is positively related to announcement returns but does not predict higher future performance. Analysts do not revise their earnings forecasts after the announcement date. Our results are more consistent with liquidity‐based theories. We find that managers choose higher stock dividend ratios if share prices deviate more from the industry‐wide average. Increases in proportional spreads, depth, and the number of trades and decreases in average trade size, and price impact suggest greater participation of liquidity and small investors following stock dividends.     

Time-varying risk premia and the cost of capital: An alternative implication of the Q theory of investment

Evidence suggests that expected excess stock market returns vary over time, and that this variation is much larger than that of expected real interest rates. It follows that a large fraction of the movement in the cost of capital in standard investment models must be attributable to movements in equity risk-premia. In this paper we emphasize that such movements in equity risk premia should have implications not merely for investment today, but also for future investment over long horizons. In this case, predictive variables for excess stock returns over long-horizons are also likely to forecast long-horizon fluctuations in the growth of marginal Q, and therefore investment. We test this implication directly by performing long-horizon forecasting regressions of aggregate investment growth using a variety of predictive variables shown elsewhere to have forecasting power for excess stock market returns.     

THE RELATION AMONG DIVIDEND POLICY,FIRM SIZE,AND THE INFORMATION CONTENT OF EARNINGS ANNOUNCEMENTS

In this paper we investigate the role of dividends in explaining the size effect. The previous literature concludes that before the firm's earnings announcement, small firm stock prices impound less information than large firm stock prices. This size effect is evidenced by the greater market reaction to small firm earnings announcements than to large firm earnings announcements. We find that if the dividend announcement precedes the earnings announcement, no size effect exists. The implication is that the information conveyed by dividend announcements includes the information conveyed to investors in large firms by other information sources. However, if the firm does not pay dividends or if the firm's earnings announcement precedes its dividend announcement, the size effect exists. The implication is that dividends do not completely explain the size effect. That is, there are information sources other than dividends that are exclusively available to investors in large firms, and the information provided by these sources is reflected in the stock price of large firms before the earnings announcement.     

The information content of cash dividend announcements in a unique environment

Due to its distinctive institutional background, Oman offers a valuable opportunity to examine stock price reactions to dividend announcements. In Oman, (1) there are no taxes on dividends and capital gains, (2) there is a high concentration of share ownership, (3) there is low corporate transparency, and (4) firms frequently change their dividends. Our results show that announcements of dividend increases are associated with increased stock prices, while announcements of dividend decreases cause decreases in stock prices. Firms that do not change their dividends experience insignificant negative returns. These results contradict tax-based signaling models, which argue that higher taxes on dividends relative to capital gains are a necessary condition for dividends to be informative.     

Dividend tax signaling and the pricing of future earnings: a case of taxable stock dividends

The purpose of our study is to explore what types of information content are conveyed by dividends on future earnings. We examine this issue by investigating the effect of dividends on the association between current year stock returns and future earnings (i.e. the future earnings response coefficient, FERC). Based on exploring the Taiwan market, our results reveal that taxable stock dividends enhance the FERC while nontaxable stock dividends do not, consistent with the tax-based signaling argument. We also find a positive relation between cash dividends and the FERC in firms with severe free cash flow problems, and this suggests that higher cash payouts mitigate manager over-investment so future earnings are more highly valued, consistent with the agency argument. Our main contributions are to specify what factors make dividends informative with regard to future earnings and the provision of evidence to support the tax-based signaling model.     

The Predictive Ability of Dividend and Earnings Yields for Long-Term Stock Returns

We use empirical models to examine the predictive ability of dividend and earnings yields for long‐term stock returns. Results show that dividend and earnings yields share a similar predictive power for future stock returns and growth. We find that the predictive power of dividend yields increases with the return horizon, but that yields forecast future returns and growth over a much longer horizon. Finally, dividend and earnings yields exhibit high autocorrelation and strong contemporaneous relations.     

Slow price reactions to analysts’ recommendation revisions

This study explores the reasons for the slow price reactions to analysts’ recommendation revisions. We predict that analysts’ recommendation revisions contain earnings-related information that is not incorporated in analysts’ earnings forecasts and that the slow price reaction is attributable to a gradual incorporation of this earnings-related information into stock prices. We find that, consistent with our prediction, stocks with recommendation upgrades subsequently experience more upward earnings forecast revisions than stocks with recommendation downgrades, and that the differences in subsequent stock returns between upgraded and downgraded stocks is attributable to differences between subsequent earnings forecast (especially, FY2 earnings forecast) revisions.     

Do investor expectations affect sell-side analysts’ forecast bias and forecast accuracy?

We examine the association between investor expectations and its components and sell-side analysts’ short-run quarterly earnings forecast bias and forecast accuracy. To measure investor expectations, we use the Index of Consumer Expectations survey and decompose it into the “fundamental” component related to underlying economic factors (FUND) and the “sentiment” component unrelated to underlying economic factors (SENT). We find that analysts are the most optimistic and the least accurate when SENT is higher. Management long-horizon earnings forecasts attenuate the effects of SENT on forecast optimism and forecast accuracy. Analysts are also the most accurate when FUND is higher. Last, the market places more weight on unexpected earnings when SENT is high. These findings suggest that analysts are affected by investor sentiment and the market reacts more strongly to unexpected earnings when analyst forecasts are the least accurate. The last result potentially explains why prior research (for example, Baker and Wurgler, The Journal of Finance 61:1645–1680, 2006) finds an association between investor sentiment and cross-sectional stock returns.     

The Market Reaction to Discontinuing Regular Stock Dividends

This paper investigates the behavior of returns to share-holders of NYSE and AMEX firms that publicly announce the discontinuance of regular stock dividends. Using event-type methodology, the results show that the average abnormal return for NYSE and AMEX firms is negative but not statistically significant on the event date. Partitioning the sample by stock-related characteristics shows that for small firms with low stock prices and low institutional ownership, management's decision to drop regular stock dividends conveys a significantly negative signal, which, in turn, causes stock prices to decline. Firms that drop a stock payment and simultaneously initiate or increase cash dividends experience a significant increase in shareholder wealth. However, firms that drop the stock dividend policy and do not begin a cash dividend policy experience a sharp decline in shareholder wealth.     

The Impact of Analysts' Forecast Errors and Forecast Revisions on Stock Prices

Abstract:  We present a comprehensive analysis of the association between stock returns, quarterly earnings forecast errors, and quarter-ahead and year-ahead earnings forecast revisions. We find that forecast errors and the two forecast revisions have significant effects on stock prices, indicating each conveys information content. Findings also show that the fourth quarter differs from other quarters—the relative importance of the forecast error (quarter-ahead forecast revision) is lower (higher). We also find a marked upward shift over time in the forecast error and forecast revision coefficients, consistent with the I/B/E/S database reflecting an improved quality of both earnings forecasts and actual earnings.     

Some further theoretical and empirical implications regarding the relationship between earnings,dividends and stock prices

In this paper earnings, dividends and stock prices are modelled within a plausible economic framework. The first stage in the analysis involves characterization of the dynamic behavior of earnings, evidence was found for mean reverting behavior in the long term, and weaker evidence for mean reversion in the short term. The relationship between dividends and earnings is then examined using a modified form of the Lintner model. The empirical results suggest the modified formulation performs as effectively as the original Lintner approach. Using these findings, we then develop the functional form of the corresponding share price relationship. As a consequence of using a generalized model for earnings we are able to examine theoretically, the effect of different earnings processes on share price behavior. The empirical results imply that changes in earnings per share and earnings per share are important in explaining returns.     

Comovements of earnings, dividends, and stock prices

We investigate the comovements of the log of earnings, dividends, and stock prices by testing for the number of common stochastic trends among these series. We find that the three series are cointegrated with a single cointegrating vector. Our findings collectively imply that (i) there is an equilibrium force that tends to keep these series together over time, (ii) changes in dividends are primarily influenced by changes in some measure of permanent earnings, and (iii) a substantial fraction of stock price movement is driven by neither earnings changes nor dividend changes. When we take into account the cointegration relationship, we find that the dynamic relationship between these variables is significantly affected. We present a common stochastic trends model of earnings, dividends, and stock prices, whose implications are broadly consistent with these findings.     

The valuation effects of stock splits and stock dividends

This study presents evidence which indicates that stock prices, on average, react positively to stock dividend and stock split announcements that are uncontaminated by other contemporaneous firm-specific announcements. In addition, it documents significantly positive excess returns on and around the ex-dates of stock dividends and splits. Both announcement and ex-date returns were found to be larger for stock dividends than for stock splits. While the announcement returns cannot be explained by forecasts of imminent increases in cash dividends, the paper offers several signalling based explanations for them. These are consistent with a cross-sectional analysis of the announcement period returns.     

A Test of the Relative Pricing Effects of Dividends and Earnings: Evidence from Simultaneous Announcements in Japan

We study the pricing effects of dividend and earnings announcements by taking advantage of the unique setting in Japan where managers simultaneously announce the current year's dividends and earnings as well as forecasts of next year's dividends and earnings. Defining surprises as deviations from analysts' forecasts, we find that share price reactions are significantly affected by earnings surprises, especially management forecasts of next year's earnings. The information content of dividends is marginal and is restricted to announcements of next year's dividends. Consistent with Modigliani and Miller's dividend irrelevance proposition, current dividend surprises have no material impact on stock prices in Japan.     

Fundamentalists,chartists and asset pricing anomalies

This paper investigates whether excess volatility of asset prices and serial correlations of stock monthly returns may be explained by the interactions between fundamentalists and chartists. Fundamentalists forecast future prices cum dividends through an adaptive learning rule. In contrast, chartists forecast future prices based on the observation of past price movements. Numerical simulations reveal that the interplay of fundamentalists and chartists robustly generates excess volatility of asset prices, volatility clustering, trends in prices (i.e. positive serial correlations of returns) over short horizons and oscillations in prices (i.e. negative serial correlations of returns) over long horizons, often observed in financial data. Moreover, we find that the memory of the learning rule plays a key role in explaining the above-mentioned stylized facts. In particular, we establish that excess volatility of asset prices; volatility clustering and autocorrelation of returns at different horizons emerge when fundamentalists have short memory. However, volatility clustering as well as short-run and long-run dependencies, observed in financial time series, are more pronounced when fundamentalists have longer memory.