Working Paper: NBER ID: w3676
Authors: Bruce N. Lehmann
Abstract: In a Modigliani-Miller world, price equals the risk-adjusted present value of future dividends and dividend policy is irrelevant for asset pricing. This paper searches for cash flows with two characteristics: asset prices can be calculated from their present values and they are invariant with respect to dividend policy. Residual income measures with these features are identified under two assumptions: dividend policy does not alter risk premiums and income earned from investments associated with dividend policy includes capital gains and losses. These results hold for otherwise arbitrary risk premiums in the general no-arbitrage approach to the valuation of uncertain income streams.
Keywords: Dividend Policy; Present Value; Cash Flows; Asset Pricing
JEL Codes: G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dividend policy (G35) | asset pricing (G19) |
| dividend policy (G35) | cash flows (G19) |
| cash flows (G19) | asset pricing (G19) |
| dividend policy (G35) | valuation of stocks (G12) |
| dividend policy (G35) | perceptions of value (D46) |
| dividend policy (G35) | risk premiums (G19) |