Valuation Model Bias and the Scale Structure of Dividend Discount Returns

Abstract

The Dividend Discount return model (DDM) is a stock valuation tool used by many financial institutions. It is a natural generalization of the yield-to-maturity concept used to value bonds. In perhaps its most standard form (Sharpe (1981), pp. 381-82), analysts' forecasts of earnings, dividends, earnings growth rates and payout ratios are used to derive anticipated future dividends. The dividend discount return is defined as the internal rate of return that equates current price to the discounted stream of anticipated future dividends.