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Disappearing Dividends: Implications for the Dividend–Price Ratio and Return Predictability




  • We thank the editor (Pok-sang Lam) and two anonymous referees as well as conference and seminar participants at ESWC 2010, KEA 2010, SETA 2010, Korea University, Sogang University, and Sungkyunkwan University for helpful comments and discussions. Kim acknowledges financial support from the National Research Foundation of Korea (KRF-2008-342-B00006) and the Bryan C. Cressey Professorship at the University of Washington. Usual disclaimers apply.


The conventional dividend–price ratio is highly persistent, and the literature reports mixed evidence on its role in predicting stock returns. We argue that the decreasing number of firms with a traditional dividend-payout policy is responsible for these results, and develop a model in which the long-run relationship between the dividends and stock price is time varying. An adjusted dividend–price ratio that accounts for the time-varying long-run relationship is considerably less persistent. Furthermore, the predictive regression model that employs the adjusted dividend–price ratio as a regressor outperforms the random-walk model. These results are robust with respect to the firm size.