Expected returns and expected dividend growth |
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| Affiliation: | 1. University of Toronto, 105 St. George Street, Toronto, ON M5S 3E6, Canada;2. Collegio Carlo Alberto, Via Real Collegio, 30, 10024 Moncalieri (Torino), Italy;1. NYU, NBER, and CEPR, Department of Finance, Stern School of Business, New York University, 44 W. 4th Street, New York, NY 10012, USA;2. Stanford and NBER, Department of Finance, Stanford GSB, 655 Knight Way, Stanford CA 94305, USA;1. University of Chicago Booth School of Business, 5807 South Woodlawn Avenue, Chicago, IL 60637, USA;2. Tuck School of Business at Dartmouth College, 100 Tuck Hall, Hanover, NH 03775, USA;3. University of Southern California Marshall School of Business, 3670 Trousdale Parkway, Los Angeles, CA 90089, USA;4. National Bureau of Economic Research, USA;1. Harvard University, Littauer Center, Cambridge MA, 02138, USA;2. National Bureau of Economic Research, Cambridge MA, USA;3. Yale School of Management, 165 Whitney Avenue, New Haven CT, 06511, USA;4. London School of Economics, Department of Finance, London, WC2A 2AE, UK;5. Dodge and Cox, 555 California St., San Francisco CA, 94104, USA |
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| 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. |
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