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JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. Wiley and American Finance Association are collaborating with JSTOR to digitize, preserve and extend access THE QUESTION BEFORE the house is whether dividends are in some sense of the word weighted differently from retained earnings at the margin in the minds of marginal investors. As evidenced by the current literature on the subject, the answer is by no means self-evident.Although the problem that confronts us can be approached in a variety of ways, our preference is to commence with net cash flows from operations and to consider the effect of additions to, and subtractions from, these flows upon stock values.' Not only does this starting point by-pass certain measurement problems, but it also directs attention to the relevant variables in a manner that other approaches may not.Net cash flows from operations are available for (1) the payment of interest and principal on debt or the equivalent and (2) capital expenditures and dividend payments. Operating cash flows can, of course, be supplemented in any period by debt or equity financing. Debt financing creates obligations to pay out cash in future periods and thereby reduces cash flows available for capital expenditures and dividends in those periods. Equity financing, in turn, diminishes the pro rata share of total cash flows available for dividends and reinvestment.The stockholder shares in the operating cash flows of each period to the degree that cash dividends are declared and paid and in future cash flows insofar as they are reflected in the market price of the stock.2 In like fashion, the purchaser of a share of stock acquires (1) a finite stream of anticipated cash dividends and (2) an antici-* University of Pennsylvania. As a point of departure, net cash flows from operations lie somewhere between(1) net cash flow and (2) net operating income. See, for example, Bodenhorn (1). For an illustrative breakdown and an explanation of the manner in which net operating cash flows are derived from balance sheets and income statements, refer to chapter 11 of Walter (12).2. It almost goes without saying that an existing shareholder periodically compares the objective market price with his subjective version of anticipated dividend streams and terminal prices to determine whether to hold or liquidate. In this respect, his behavior resembles that of a prospective buyer.

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