The authors are from UNC Chapel Hill, USA. This work was supported in part by Nations Bank Research Fellowships at UNC. The authors are grateful for the comments of J. Abarbanell, M. Barth, B. Beaver, P. Hughes, A. Hutton, R. Lambert, C. Lee, S. Monahan, K. Palepu, S. Penman, P. Pope, W. Rees, S. Ryan, A. Stark, D. Thornton, S. Young and seminar participants at the 2004 JBFA Conference, Columbia, Cornell, Harvard, Stanford, Washington University at St. Louis, and William & Mary on an earlier version of the paper entitled ‘Testing the Ohlson Model: v or not v, that is the Question.’ I/B/E/S provided the analyst forecast data.
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The Pricing of Dividends in Equity Valuation
Article first published online: 20 APR 2005
DOI: 10.1111/j.0306-686X.2005.00600.x
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How to Cite
Hand, J. R. M. and Landsman, W. R. (2005), The Pricing of Dividends in Equity Valuation. Journal of Business Finance & Accounting, 32: 435–469. doi: 10.1111/j.0306-686X.2005.00600.x
Publication History
- Issue published online: 20 APR 2005
- Article first published online: 20 APR 2005
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Keywords:
- accounting-based valuation;
- dividend displacement
Abstract: This study uses Ohlson's (1995 and 2001) accounting-based equity valuation model to structure tests of four explanations for the anomalously positive pricing of dividends reported by Rees (1997) and Fama and French (1998). First, we find that dividends are not simply a proxy for publicly available information that helps predict future abnormal earnings. Second, although dividends act as if they signal managers’ private information about future profitability, they remain positively priced for firms with low incentives to signal. Third, dividends do not signal management's willingness to abstain from incurring agency costs. Fourth, however, controlling for one-year-ahead realized forecast errors yields a pricing of dividends that is very close to that of dividend displacement. After showing that dividends are not simply a proxy for analysts’ misforecasting, we conclude that dividends appear to be positively priced because they are a proxy for the mispricing by investors of current earnings or book equity.