Do Private Firms' Dividends Predict Stock Returns?

Abstract

In this paper I show that information about fundamentals of the aggregate economy derived from closely held firms help predict stock returns. I construct a new economy-wide dividend price ratio that takes into account dividends and market capitalization of both listed (public) and non-listed (private) U.S. companies and show that it strongly predicts stock returns with in-sample and out-of-sample annual adjusted R2 of 15.35% and 16.28%, compared to the standard dividend price ratio values of 5.32% and -1.14%, respectively. I also find that changes in dividends of private firms lead those of public firms and that the economy-wide dividend price ratio subsumes the standard dividend price ratio.