Abstract
In this paper we present a modified version of the present value stock price model in which stock prices are explained by dividends and a retention term. It is argued that the retention term may have important information for stock prices over-and-above that contained in dividends. The model is tested using a well-known US data base and recently developed time series techniques. We demonstrate, inter alia, that a unique cointegrating relationship exists amongst stock prices, dividends and the retention term, and we establish a dynamic error correction model which has a number of appealing features.
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