Asset pricing with dividend surprises

Abstract

In this paper, we derive an intertemporal dividend-surprise-augmented asset-pricing model and show that the expected risk premium compensates for stock returns’ exposure to (i) the market-wide dividend-surprise hedge portfolio based on dividend yield surprise and volatilities, in addition to (ii) the excess market return without dividend yield (as in the conventional CAPM) and (iii) the market-wide dividend yield factor without uncertainty. Our model implies that the uncertainty on dividend-surprise yield is attributable to systematic risk and should be priced at the cross-section, thereby theoretically supporting the existing empirical studies on the relation between dividend surprise and cross-sectional stock returns.