Dividend growth predictability and the price-dividend ratio

Journal article

Asymptotic tests over-reject the null of no predictability in present-value models. We develop a nonparametric testing approach in state space models, implying reliable finite sample inference under weak assumptions on price-dividend ratio and dividend shocks. We find sharp evidence of return predictability in postwar US data, but a less consistent evidence of dividend predictability, which is significant only using cash-flow proxies reflecting information from mergers and acquisitions. These findings reconcile the diverging conclusions of present-value models and common predictive regressions, in a way that is robust to the choice of the predictive variables, the sample period and alternative cash-flow proxies.

Authors: Piatti, I; Trojani, F

• Publication status: Published
• Peer review status: Peer reviewed
• Publisher: INFORMS
• Journal: Management Science
• Volume: 66
• Issue: 1
• Pages: 130-158
• Publication date: 2019-05-20
• Acceptance date: 2018-06-12
• DOI: 10.1287/mnsc.2018.3155
• EISSN: 1526-5501
• ISSN: 0025-1909
• Keywords: state space model; predictability; likelihood ratio test; present-value model; bootstrap