Dividend Yields, Dividend Growth, and Return Predictability in the Cross-Section of Stocks
Paulo Maio and Pedro Santa-Clara | Nov 2012
There is a generalized conviction that variation in dividend yields is exclusively related to expected returns and not to expected dividend growth — e.g. Cochrane’s presidential address (Cochrane, 2011). We show that this pattern, although valid for the stock market as a whole, is not true for small and value stocks portfolios where dividend yields are related mainly to future dividend changes. Thus, the variance decomposition associated with aggregate dividend yields (commonly used in the literature) has important heterogeneity in the cross-section of equities. Our results are robust for different forecasting horizons, econometric methodology used (direct long-horizon regressions or first-order VAR), and also confirmed by a Monte-Carlo simulation.
Drained by DRIPS: The Hidden Cost of Buying on the Dividend Pay Date
Henk Berkman and Paul D. Koch | Nov 2012
On the day that dividends are paid we find a significant positive mean abnormal return, followed by a reversal that negates most of this price appreciation. This temporary dividend pay date effect has grown in magnitude since the 1970’s, and is concentrated among high dividend yield stocks that offer dividend reinvestment plans (DRIPs). Since the mid-1990s, these stocks yield a mean abnormal return close to 0.5% on the dividend pay date. This temporary inflation is larger in magnitude for stocks subject to greater limits to arbitrage. Quarterly profits from a trading strategy to exploit this anomaly are economically significant, and related to time series movements in market sentiment, transaction costs, the dividend premium, and the VIX. For investors who reinvest their dividends on the pay date, this temporary inflation represents a substantial implicit transaction cost.
Do Firm-Level Fundamentals Still Matter? – A Re-Examination of Market Anomalies
Samuel Xin Liang | Oct 2012
We re-examine market anomalies over the 1990-2011 period and find that the book-to-market and cash flow-to-price ratios predict higher future short-, medium- and long-term returns and alphas whereas size, price, momentum, short-term reversal, beta, volatility, the earnings-to-price ratio and dividend yield do not. Meanwhile, volatile stocks have higher future six-, nine-, and 12-month returns, contradicting the volatility puzzle of one-month returns. These findings suggest that the U.S. market has become weak-form market efficient which supports the assumption of many classical finance theories. We also find that conservatism and representativeness cannot explain the driving force behind firm-level fundamental information on stock returns. We also discover that monetary policy does not make a market efficient since both past returns and fundamentals predict higher future returns and alphas in Hong Kong which shares the same monetary policy with the U.S. However, firm-level fundamentals also drive the aggregate return differences between these two markets.
Modelling Time-Variation in the Stock Return-Dividend Yield Predictive Equation
David G. McMillan | Oct 2012
Using data for forty markets, this paper examines the nature and possible causes of time-variation within the stock return-dividend yield predictive regression. The results in this paper show that there is significant time-variation in the predictive equation for returns and that such variation is linked to economic and market factors. Furthermore, the strength and nature of those links are themselves time-varying. The inclusion of this time-variation in the predictive equation increases the predictive power compared to the standard constant parameter predictive model. Evidence is also reported for time-varying dividend growth predictability. Long-horizon predictability is also examined with evidence reported that the nature of the factors affecting time-varying predictability changes with horizon. The results here, while directly contributing to the returns predictability debate, in particular regarding its existence and source, may also inform the discussion that links time-varying expected returns (and risk premium) to economic factors.
Effects of Dividend Ratios and Other Fundamentals on Forward P/Es – Some Evidences from a Worldwide Cross-Sectional Multivariate Analysis
Marco Taliento | Nov 2012
This study seeks to regress the forward P/Es on firms’ fundamentals as measured on global market basis. Starting from theoretical premises (DDM), the paper develops a linear multivariate model in order to capture (for US, Australia / New Zeland / Canada, Europe, Japan and Emerging Markets quoted companies) the underlying value-drivers. The regression is cross-sectional with annual data referred to 2010, a financial year – immediately after the explosion of the GFC [global financial crisis]– which exhibits signals of both slight recovery and persisting uncertainty. Results about the dividend yield confirm the hypotheses whilst the association with payouts appears surprisingly negative. Other control financial variables are tested.