MARKET VALUES, EARNINGS AND DIVIDENDS: DIFFERENCES BETWEEN FIRMS PAYING DIVIDENDS AND FIRMS NOT PAYING DIVIDENDS

摘要

This paper examines the valuation links affecting common stock prices and earnings or dividends. On a rnbasis relative to book value, companies paying dividends show lower earnings, lower current ratios, and rnlower total assets to liabilities ratios than companies paying no dividends. The average market prices of rncompanies paying dividends are lower than those of companies paying no dividends. At this stage, the rnevidence seems to indicate that paying dividends has a negative effect on market prices. However, rnexamining only firms paying dividends after controlling for income, we find that the higher the dividend rnpayout is relative to book value, the higher the share price is relative to book value. The evidence seems rnto indicate that paying dividends has a positive effect on market prices. rnCurrent literature assumes that current common stock market values represent the present value of future rncash flows and, also assume, that dividends signal future earnings or cash flows. However, this would rnbe significant only when there is a strong positive relationship between current dividends and future rnearnings. For example, Easton[2] examined the valuation link of current dividends and current earnings rnwith more sophisticated statistical tools. Their approach utilized two-step regressions: the first step, rnmeasured the present value of future dividends on the security market price; the second step, measured rnthe estimated present value of future dividends predicted by the first model on current earnings and rndividends. They reported that, in general, higher current dividends imply higher stock prices but, for a rngiven level of accounting earnings, higher current dividends imply lower stock prices instead of higher rnstock prices. This seemingly contradiction might arise from running linear regressions while the real rnrelationships are not linear. Other studies, Cheng, Hopwood, and McKeown[1] and Zhang[3] reported rnempirical results of non-linear relationships between stock returns and earnings. Like many of the rnprevious studies, we examine the valuation link of stock prices and earnings or dividends. However, rnunlike most prior studies that examine the information content of dividends and earnings on stock prices rnassuming a present value relationship, we test directly the present value relationship between dividends rnand stock prices.