A Test of a Risk‐adjusted Dividend Capitalization Model: The Case of Liquidating Firms

Abstract

In this paper a direct test of the descriptive validity of the dividend capitalization model is described using the capital asset pricing model (CAPM) to specify the required rate of return. The sample comprises thirty-five voluntarily liquidating firms for which publicly available records of liquidating dividends are available. The sample provides a novel basis for testing the dividend capitalization model since: (l) the firms' risk does not change because of investment activity. (2) the decision horizon for stock valuation purposes is clearly the period over which cash dividends are paid to shareholders. and (3) it is unnecessary to estimate dividend growth rates or terminal stock values. Results are generally consistent with a market that values these stocks by applying a risk-adjusted dividend capitalization model.