On the Predictability of Japanese Stock Returns Using Dividend Yield

The aim of this paper is to provide a critical and comprehensive reexamination of empirical evidence on the ability of the dividend yield to predict Japanese stock returns. Our empirical results suggest that in general, the predictability is weak. However, (1) if the bubble economy period (1986–1998), during which dividend yields were persistently lower than the historical average, is excluded from the sample, and (2) if positive autocorrelation in monthly aggregate returns is taken into account, there is some evidence that the log dividend yield is indeed useful in forecasting future stock returns. More specifically, the log dividend yield contributes to predicting monthly stock returns in the sample after 1990 and when lagged stock returns are included simultaneously.     

DEBT REFUNDING AND SHAREHOLDER WEALTH: THE PRICE EFFECTS OF DEBT-FOR-DEBT EXCHANGE OFFER ANNOUNCEMENTS

This study examines the impact of debt refunding on common stock prices for a sample of 48 exchange offers announced from 1970 through 1981. Exchange offer announcements do not have a significant impact on average common stock returns but appear to produce idiosyncratic share price effects. Refunding-induced price effects were unrelated to several exchange offer characteristics including tax shield increases, exchange offer premia, and transaction costs of refunding. Common stock excess returns were negatively related to reductions in debt service payments and relaxation of dividend payment constraints. Thus, the evidence is consistent with theories predicting that certain debt refundings generate negative information-signaling price effects.     

On the reversal of return and dividend growth predictability: A tale of two periods

A disconcerting, albeit generally accepted, finding is that aggregate stock returns are predictable by dividend yield but dividend growth is unpredictable. I show that part of this lack of dividend growth predictability stems from how dividend growth is constructed. I then show a dramatic reversal of predictability in the 134 years during 1872–2005: stock returns are largely unpredictable in the first seven decades, but become predictable in the postwar period; dividend growth is strongly predictable in the prewar years but this predictability disappears in the postwar years. New evidence on the predictability of long-run returns and dividend growth is also shown.     

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.     

Capital Gains, Dividend Yields, and Expected Inflation

One explanation for the negative relationship between short-horizon stock returns and inflation is that inflation proxies (inversely) for expected future real output. In this paper, I examine the possibility that inflation also proxies for variation in real price/dividend ratios (excess returns). I show that when the covariance between real price/dividend ratios and inflation is nonzero, the relationship between returns and expected inflation differs for the two components of returns: dividend yields and capital gains returns. My empirical evidence demonstrates that dividend yields and capital gains are related differently to expected inflation in U.S. and foreign markets.     

Stock returns,dividend yield,and book-to-market ratio

A dividend yield model has been widely used in previous research that relates stock market valuations to cash flow fundamentals. Given controversies about using dividends as a proxy for cash flows, a loglinear book-to-market model has recently been proposed. However, these models rely on the assumption that dividend yield and book-to-market ratio are both stationary, and empirical evidence for this is, at best, mixed. We develop a new model, the loglinear cointegration model, that explains future profitability and excess stock returns in terms of a linear combination of log book-to-market ratio and log dividend yield. The loglinear cointegration model performs better than the log dividend yield model and the log book-to-market model in terms of cross-equation restriction tests and forecasting performance comparisons. The superior performance of the loglinear cointegration model suggests that the linear combination may be a better indicator of intrinsic fundamentals than the dividend yield or the book-to-market ratio separately.     

Dividend Stability, Dividend Yield and Stock Returns: UK Evidence

This paper establishes an empirical role for two measures of dividend stability (as a proxy for dividend policy) in explaining UK stock returns. There is little systematic empirical evidence concerning the relation between dividend stability, dividend yield and stock returns despite the fact that a variety of theoretical models point to dividend policy as an important stock attribute. Here we construct two definitions of dividend stability, one of which involves dividend cuts, and use a sample of all listed UK firms from 1975 to 1997 to explore the relationship between stock returns and a variety of characteristics, including dividend stability. We find an inverse correlation between the stability of past dividend policy and systematic risk. Both stability measures have explanatory power over returns, but this is concentrated in January.     

Dividend Stability, Dividend Yield and Stock Returns: UK Evidence

This paper establishes an empirical role for two measures of dividend stability (as a proxy for dividend policy) in explaining UK stock returns. There is little systematic empirical evidence concerning the relation between dividend stability, dividend yield and stock returns despite the fact that a variety of theoretical models point to dividend policy as an important stock attribute. Here we construct two definitions of dividend stability, one of which involves dividend cuts, and use a sample of all listed UK firms from 1975 to 1997 to explore the relationship between stock returns and a variety of characteristics, including dividend stability. We find an inverse correlation between the stability of past dividend policy and systematic risk. Both stability measures have explanatory power over returns, but this is concentrated in January.     

Do Long-Term Shareholders Benefit From Corporate Acquisitions?

Using 947 acquisitions during 1970–1989, this article finds a relationship between the postacquisition returns and the mode of acquisition and form of payment. During a five-year period following the acquisition, on average, firms that complete stock mergers earn significantly negative excess returns of ?25.0 percent whereas firms that complete cash tender offers earn significantly positive excess returns of 61.7 percent. Over the combined preacquisition and postacquisition period, target shareholders who hold on to the acquirer stock received as payment in stock mergers do not earn significantly positive excess returns. In the top quartile of target to acquirer size ratio, they earn negative excess returns.     

Consumption, Aggregate Wealth, and Expected Stock Returns

This paper studies the role of fluctuations in the aggregate consumption–wealth ratio for predicting stock returns. Using U.S. quarterly stock market data, we find that these fluctuations in the consumption–wealth ratio are strong predictors of both real stock returns and excess returns over a Treasury bill rate. We also find that this variable is a better forecaster of future returns at short and intermediate horizons than is the dividend yield, the dividend payout ratio, and several other popular forecasting variables. Why should the consumption–wealth ratio forecast asset returns? We show that a wide class of optimal models of consumer behavior imply that the log consumption–aggregate wealth (human capital plus asset holdings) ratio summarizes expected returns on aggregate wealth, or the market portfolio. Although this ratio is not observable, we provide assumptions under which its important predictive components for future asset returns may be expressed in terms of observable variables, namely in terms of consumption, asset holdings and labor income. The framework implies that these variables are cointegrated, and that deviations from this shared trend summarize agents' expectations of future returns on the market portfolio.     

Do Tax Law Changes Influence Ex-Dividend Stock Price Behavior? Evidence from 1926 to 2005

We test the Elton and Gruber model of ex-dividend stock pricing over a period spanning all US tax law changes since 1926. Our results indicate that price drop ratios (ΔP/D) and ex-day returns are related to dividend and capital gains tax rates in the theorized manner. Consistent with tax clienteles, we also find that ex-day price movements of higher dividend yield stocks are driven more by corporate tax rates, while lower yield stocks are more influenced by personal rates. Finally, we demonstrate that the positive relationship between ΔP/D and the dividend yield becomes stronger as the tax differential | t_d− t_cg | widens.     

Stock returns and economic forces—An empirical investigation of Chinese markets

This study finds evidence that a better macroeconomic climate and an improvement in liquidity help to explain Chinese stock returns. There is no evidence to support the hypothesis that growth in dividend yields can predict stock returns. The sectoral stock returns in China's markets are correlated with stock returns in the US markets as evidenced by: (i) a positive correlation with US stock returns; (ii) a significant negative error correcting term; (iii) a negative response of Chinese stocks to financial stress in the US market; and (iv) a positive correlation with a depreciation in the China/US exchange rate.     

The effects of dividend yield and dividend policy on common stock prices and returns

This paper suggests that it is not possible to demonstrate, using the best available empirical methods, that the expected returns on high yield common stocks differ from the expected returns on low yield common stocks either before or after taxes. A taxable investor who concentrates his portfolio in low yield securities cannot tell from the data whether he is increasing or decreasing his expected after-tax return by so doing. A tax exempt investor who concentrates his portfolio in high yield securities cannot tell from the data whether he is increasing or decreasing his expected return. We argue that the best method for testing the effects of dividend policy on stock prices is to test the effects of dividend yield on stock returns. Thus the fact that we cannot tell, using the best available methods, what effects dividend yield has on stock returns implies that we cannot tell what effect, if any, a change in dividend policy will have on a corporation's stock price.     

Dividend Policies and Price-Volume Reactions to Cash Dividends on the Stock Market: Evidence from the Istanbul Stock Exchange

This study examines the effects of cash dividend payments on stock returns and trading volumes in the stock market. It also investigates whether there is any difference in the investment behavior of investors with respect to the dividend pay out ratio and size in the Istanbul Stock Exchange (ISE)from 1995 to 2003. Prices start to rise a few sessions before cash dividend payments, and on the ex-dividend day, they fall less than do dividend payments, finally decreasing in the sessions following the payment. Trading volume shows a considerable upward shift before the payment date and, interestingly, is stable after Thus, cash dividends influence prices and trading volumes in different ways before, at, and after payment, providing some profitable active trading strategy opportunities around the ex-dividend day. The findings support price-volume reaction discussions on the divident payment date and the significant effect of cash dividends on the stock market.     

COSKEWNESS,DIVIDEND YIELD AND CAPITAL ASSET PRICING

The coskewness and dividend yield effects on capital asset prices have been established in two separate literatures. Neither literature controls for the variable in the other, nor for other potentially confounding factors such as size of the firm and the January effect on returns. Using stock return data for 1969–1978, this study provides evidence of coskewness, size, yield and January effects on stock returns. Coskewness appears to be a surrogate variable for dividend yield. When yield is controlled for, the coskewness effect cannot be detected. Hence, the significance of coskewness seems to result from the presence of the uncontrolled factor, dividend yield.     

Four centuries of return predictability

We combine annual stock market data for the most important equity markets of the last four centuries: the Netherlands and UK (1629–1812), UK (1813–1870), and US (1871–2015). We show that dividend yields are stationary and consistently forecast returns. The documented predictability holds for annual and multi-annual horizons and works both in- and out-of-sample, providing strong evidence that expected returns in stock markets are time-varying. In part, this variation is related to the business cycle, with expected returns increasing in recessions. We also find that, except for the period after 1945, dividend yields predict dividend growth rates.     

Stock and bond returns with Moody Investors

We present a tractable, linear model for the simultaneous pricing of stock and bond returns that incorporates stochastic risk aversion. In this model, analytic solutions for endogenous stock and bond prices and returns are readily calculated. After estimating the parameters of the model by the general method of moments, we investigate a series of classic puzzles of the empirical asset pricing literature. In particular, our model is shown to jointly accommodate the mean and volatility of equity and long term bond risk premia as well as salient features of the nominal short rate, the dividend yield, and the term spread. Also, the model matches the evidence for predictability of excess stock and bond returns. However, the stock–bond return correlation implied by the model is somewhat higher than that in the data.     

Expected returns and expected dividend growth

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.     

The informational content of the timing of dividend announcements

This paper contains a test of a new aspect of the informational content of dividend; namely, is there information in the timing of the announcements? The empirical evidence indicates that the market expects ‘bad news’ to be delivered late and that these expectations are confirmed. Mean excess returns of stock prices around late announcements are, depending on the assumed returns generating process, either significantly negative or insignificant while significantly positive around the entire population of announcements. Moreover, the proportion and magnitude of dividend reductions associated with late announcements are significantly larger than in the complete universe of announcements.     

THE INFORMATION CONTENT OF DIVIDEND CHANGES

In this study, the open empirical question as to whether or not dividends contain information is investigated. The study involves 200 stocks and 376 dividend announcements over the 1971 to 1977 period; measures of unexpected dividends are related to measures of abnormal returns for dividend changing stocks. This study is important for three reasons:

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