Working Paper: NBER ID: w18450
Authors: Frederico Belo; Pierre Collin-Dufresne; Robert S. Goldstein
Abstract: Many leading asset pricing models predict that the term structures of expected returns and volatilities on dividend strips are strongly upward sloping. Yet the empirical evidence suggests otherwise. This discrepancy can be reconciled if these models replace their exogenously specified dividend dynamics with processes that are derived endogenously from capital structure policies that generate stationary leverage ratios. Under this policy, shareholders are being forced to divest (invest) when leverage is low (high), which shifts risk from long-horizon to short-horizon dividend strips. This framework also generates stock volatility that is higher than long-horizon dividend volatility, even with constant market prices of risk.
Keywords: No keywords provided
JEL Codes: G00; G01; G10; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital structure policies (G32) | dividend dynamics (G35) |
| stationary leverage ratios (G32) | downward-sloping term structure of expected returns and volatilities for dividend strips (G12) |
| capital structure decisions (G32) | shift of risk associated with dividends from long horizons to short horizons (G35) |
| long-horizon dividend volatility (G35) | short-horizon volatility (G17) |
| dividends are cointegrated with ebit over long horizons (G35) | risk profiles are aligned in the long run (G40) |
| variance ratios of dividends (G35) | horizon (Y60) |
| stock return volatility (G17) | long-horizon dividend volatility (G35) |
| capital structure policies (G32) | observed volatility patterns in dividend strips (G35) |