Working Paper: NBER ID: w28528
Authors: Jacky Lin; Genevieve C. Selden; John B. Shoven; Clemens Sialm
Abstract: The Dow Jones Industrial Average has historically been the most quoted stock index in the United States. It has several unique features. It uses price weights, it ignores cash dividend payments, and it also treats stock dividends, rights issues, and other corporate actions inconsistently. We show that price indices which use alternative weighting methods and more systematic inclusion criteria perform similarly to the Dow. However, ignoring cash and stock dividends underestimates the long-run returns earned by stock market investors dramatically. If the DJIA had consistently adjusted for dividends and other corporate actions since 1928, the index would have closed at 1,113,047 instead of 28,538 points at the end of 2019.
Keywords: No keywords provided
JEL Codes: G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| DJIA’s treatment of dividends and corporate actions (G35) | underestimation of long-term returns for stock market investors (G17) |
| Ignoring cash dividends (G35) | underestimation of stock market performance over long periods (G17) |
| Inconsistent treatment of stock dividends and rights issues (G35) | downward bias in reported returns (G41) |
| Average annual return with reinvested dividends (G12) | average annual return without dividends (G12) |
| Proper accounting of stock dividends and rights issues (G35) | increase in DJIA's reported value (G12) |
| Arithmetic average price return of the DJIA (G12) | performance comparison with alternative indices (C43) |