Common-Stock Price Ratios and Long-Term Interest Rates

Abstract

HE interest rate structure is a complex of many rates differentiated I by a multitude of factors, of which risk and time for repayment are among the most common employed for analysis. The central figure in the family, as frequently pictured, is the rate for nearriskless obligations of very long or even indeterminate maturity.2 At the rear of the picture and considerably out of focus is the rate at which the market capitalizes future returns from the ownership of common stock. The stock capitalization rate is seldom viewed as a regular member of the family.3 Perhaps the principal reason is that no record exists to show what expected returns were in people's minds at the time they decided to buy or to sell a stock and consequently that the rate cannot be measured directly. Nevertheless, the attention paid to earnings and dividend prospects, to times-earnings, and to dividend yields indicates that some sort of forecast of returns and some sort of capitalization rate must have been present in the minds of a number of these people4 The purpose of this study is to explore certain of the past relationships between earnings, dividends, prices, and longterm interest rates for possible clues as to the nature of the stock capitalization rate and its relation, if any, to the longterm interest rate for near-riskless obligations.5