The Dividend Discount Model: A Primer

Farrell, James L.

doi:10.2469/faj.v41.n6.16

Cited by 29 publications

(12 citation statements)

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“…A reasonable assumption to make is that even though individual firms may temporarily deviate from equilibrium, the market as a whole will be in equilibrium so that in the long 5 Classic works in finance theory contend that equities trade on the basis of their prices and discounted value of expected future cashflows (dividends) thus permitting algebraic expression of the dividend (earnings) yield as proxies for investors' required rate of return in the stock market (cf., Farrell, 1985). Samuelson (1965) shows that price changes are unforecastable if we discount future dividends at a constant rate.…”

Section: A Forward-looking Proxy For the Equity Premiummentioning

confidence: 99%

Is there a Positive Risk‐Return Tradeoff? A Forward‐Looking Approach to Measuring the Equity Premium

Koutmos

2015

Euro Fin Management

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This article revisits the puzzling time‐series relation between risk and return on the stock market portfolio. It replaces the standard ex post mean returns with forward‐looking calculations of the equity risk premium derived from the classic Gordon stock valuation model. The article estimates the equity premium for several industrialised markets and finds that conditional market risk is significantly priced in the context of asset pricing theory both in the short‐ and long‐run using various specifications for volatility. Findings herein lend credible support for the presence of a positive intertemporal risk‐return relation and suggest that perhaps ex post realised returns are unjustifiably used to make ex ante inferences regarding expected returns and to motivate asset pricing tests.

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Section: A Forward-looking Proxy For the Equity Premiummentioning

confidence: 99%

Is there a Positive Risk‐Return Tradeoff? A Forward‐Looking Approach to Measuring the Equity Premium

Koutmos

2015

Euro Fin Management

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“…Finally, the negative relationship estimated for interest rates is consistent with theory, but it is insignificant. Higher interest rates lead to a substitution of stocks into riskfree interest bearing assets (see Farrell, 1985). The insignificance of interest rates may be due to the high inflation rates from the early 1980s.…”

Section: Resultsmentioning

confidence: 99%

Assessing the dynamic relationship between small and large cap stock prices

Ho¹,

Ernst²,

Zhang

2011

Chan, F., Marinova, D. And Anderssen, R.S. (Eds) MODSIM2011, 19th International Congress on Modelling and Simulation.

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The historical long-run return on small capitalization stocks has unquestionably outperformed large capitalization stocks since 1926. The phenomenon of small capitalization stocks having higher riskadjusted returns compared with large capitalization stocks is an equity market anomaly first discovered in 1981. Since then, many academics and investors have strongly argued that "size is dead". This paper argues that far from being dead, the phenomenon of size effect appears alive and well and it could be exploited effectively over long-term investment horizons. To analyze this phenomenon, we focus specifically on the dynamics of small cap and large cap prices. We test for multivariate cointegration among the small cap and large cap stock prices and other major macroeconomic factors from 1980 to 2006. After conducting robustness tests on forward recursive and ten year rolling samples, we find evidence of one longrun cointegrating vector. Of more importance, there is a consistently negative and highly significant relationship between small and large cap stock prices. This could suggest that the size effect exhibits a cyclical pattern. Our analysis also provides supporting evidence that the size effect appears to exhibit predictable reversals when considering long investment horizons. Furthermore, we demonstrate how small cap stocks can be viewed as less risky than large cap stocks over long holding periods. Finally, we make suggestions on how asset managers and individual investors can enhance returns based on our overall results.

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“…If the firm has risky noncallable debt in its capital structure before new investments are discovered, then existing bondholders also benefit from the firm's ability to capture rents from these investments since their bankruptcy region is thereby reduced [16]. 10 Equation (14) is unnecessary for estimating the cost of equity capital (equation (11» except perhaps to estimate next year's earnings E 1 as is done further below in the paper.…”

Section: Tobin's Q and The Cost Of Equitymentioning

confidence: 99%

“…The Hebrew University, is gratefully acknowledged. caulay's duration is a measure of the discount rate sensitivity of stock prices [10]. Generally, stocks with higher dividend growth have, ceteris paribus, longer durations than stocks with lower dividend growth.…”

Section: Introductionmentioning

confidence: 99%

THE COST OF CAPITAL, MACAULAY'S DURATION, AND TOBIN'S q

Ben-Horim

Callen

1989

J of Financial Research

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It is shown empirically that the cost of equity capital estimated from the dividend discount model and Tobin's q are negatively related. The theoretical relationship between these variables is exploited to determine alternative estimates of the cost of equity capital and Macaulay's duration without having to estimate the growth rate g in the conventional manner. This new approach can readily be implemented for large firms reporting SFAS No. 33 data.

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The Dividend Discount Model: A Primer

Cited by 29 publications

References 0 publications

Is there a Positive Risk‐Return Tradeoff? A Forward‐Looking Approach to Measuring the Equity Premium

Is there a Positive Risk‐Return Tradeoff? A Forward‐Looking Approach to Measuring the Equity Premium

Assessing the dynamic relationship between small and large cap stock prices

THE COST OF CAPITAL, MACAULAY'S DURATION, AND TOBIN'S q

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